X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Working capital management across industries - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Nov 30, 2011

    Working capital management across industries

    This is the second of the series of articles on Working capital.

    Working capital cycle plays a vital role in business productivity. It is a measure of the company's efficiency in managing its operational costs. However, every industry has its own set of dynamics that influences its working capital cycle. For example, aviation sector, real estate sector, gems & jewellery, engineering, power sector, sugar sector and textile sector are highly capital intensive. These companies realize proceeds from sales over a longer time-frame. This characteristic of a longer cycle between sales and realization of proceeds is reflected in their higher working capital requirements.

    There are different reasons in each industry for the relatively longer working capital cycle. Real estate and engineering sectors involve projects which take a long time to complete, resulting in long inventory holding periods. The gems & jewellery industry imports rough diamonds, and exports the polished diamonds which translate into longer inventory and receivable days. Power distribution companies face difficulties in recovering dues from the cash-strapped State Electricity Boards and this stretches their debt holding period. The sugar and textile sectors longer working capital cycles are due to their dependence on commodity-based inputs which are seasonal in nature and necessitate their storage. Thus reasons ranging from time-consuming projects, higher levels of import/export, longer debt recovery and commodity-based seasonal inputs stretch working capital cycles. And this results in raising working capital requirements.

    Even after taking into account the benefits of credit, sectors such as real estate and textile continue to have long working capital cycles. This adversely impacts their earnings as higher debt is required to service working capital. So, the return on equity (ROE) of these sectors is among the lowest. On the other hand, sectors such as FMCG, Mining, Oil & gas and IT produce higher returns by virtue of low or negative working capital cycles.

    Working capital cycle across industries
    Industry Receivable
    (in days)
    Inventory
    (in days)
    Working cycle
    (in days)
    Payable
    (in days)
    Net working cycle
    (in days)
    Debt/Equity
    (times)
    ROE (%)
    Aviation 44 105 149 97 52 -112.0 0.0
    Cement 17 49 66 48 18 0.9 11.7
    Real Estate 127 603 730 138 592 0.7 9.8
    Gems & Jewellery 79 53 132 76 56 1.4 14.0
    Engineering 97 40 137 72 65 0.5 27.4
    IT 77 5 82 39 43 0.2 24.5
    Metals 51 36 87 9 78 0.9 19.0
    Mining 28 33 61 78 -17 0.1 31.7
    Oil & gas 26 24 50 65 -15 0.4 15.2
    Petrochemicals 35 33 68 67 1 1.0 11.5
    Power 82 22 104 77 27 0.8 10.5
    Refineries 11 39 50 40 10 0.8 14.4
    Sugar 17 124 141 84 57 1.8 9.5
    Tea/Coffee 26 57 83 54 29 0.5 16.5
    Textile 51 79 130 37 93 1.4 12.0
    FMCG 18 46 64 76 -12 0.2 37.0
    Source: Ace Equity database

    Rising working capital along with huge debts can create a precariously weak financial position threatening the survival of companies.

    The Aviation industry has been in the eye of the storm battling with cash crunch. Airline companies such as Air India, Jet Airways and Kingfisher Airlines had borrowed heavily to expand air-fleet. However, the recent surge in crude price along with the weakening rupee left the over-leveraged companies high and dry. This coupled with exorbitant state fuel taxes, high maintenance charges and irrational ticket pricing have stretched working capital cycles creating a huge strain on the cash position of the companies. In fact Kingfisher Airlines was left with no cash to run its day-to-day operations and approached the government for a bail-out. In the case of Jet Airways, the auditors have raised a red flag on its going concern status, and asked it to raise funds to maintain its operations. This shows that increasing working capital cycle can spell havoc in a debt laden company putting its existence under cloud.

    In the next article, we will study the most efficiently managed companies, and how companies can reduce this critical working capital cost component to become more profitable.

     

     

    Equitymaster requests your view! Post a comment on "Working capital management across industries". Click here!

    1 Responses to "Working capital management across industries"

    sachin cahavn

    Jun 18, 2013

    thank you so much for the details .....

    Like 
      
    Equitymaster requests your view! Post a comment on "Working capital management across industries". Click here!
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 22, 2017 (Close)

    MARKET STATS