What is Days Working Capital? What issues should you be aware of?

What is Days Working Capital?

Days Working Capital is a financial metric used to measure the efficiency of a company's use of its working capital (current assets minus current liabilities), which can also be understood as the duration of funds occupied in operational activities.

This indicator helps assess a company's ability to manage liquidity and financial risk. A shorter duration of working capital turnover generally indicates that the company can manage its capital efficiently, quickly converting funds into sales revenue, thereby reducing the time capital is occupied. Conversely, a longer turnover duration may suggest that funds are occupied for too long, indicating insufficient liquidity or inefficient operational activities.

The formula for calculating Days Working Capital is as follows: Days Working Capital = Working Capital / Average Daily Sale Cost

Where, Working Capital = Current Assets - Current Liabilities Average Daily Sale Cost = Annual Cost of Sales / 365 (assuming there are 365 days in a year)

By calculating Days Working Capital, one can assess a company's fund operation efficiency and compare it with industry standards or other companies to understand its relative performance. The goal of this metric is usually to reduce the turnover days to improve the efficiency of fund use, but the specific target value may vary depending on industry, company size, and operating model.

What should you pay attention to regarding Days Working Capital?

What is the trend of Days Working Capital? Is it stable or showing signs of improvement/deterioration?

By comparing the Days Working Capital across different periods, one can observe its trend. If the turnover days are stable or show an improvement trend, it indicates that the company is making progress in capital utilization. Conversely, if the turnover days are worsening, it may mean the company is facing issues with prolonged capital occupation or insufficient liquidity.

How does Days Working Capital compare to industry standards or competitors?

Comparing a company's Days Working Capital with industry standards or competitors can provide insights. If the company's turnover days are shorter, it suggests an advantage in capital management. On the other hand, if the turnover days are longer, further investigation may be necessary, including a comparison with the industry average.

How is Days Working Capital related to sales revenue?

The relationship between Days Working Capital and sales revenue can reflect the company's sales and inventory management efficiency. Shorter turnover days usually mean that the company can quickly convert sales revenue into cash, while longer turnover days may indicate that funds are occupied for too long. Observing the changes between turnover days and sales revenue can help assess the efficiency of the company's operational activities.

What factors affect Days Working Capital?

Days Working Capital is influenced by various factors, including supply chain management, inventory management, and the handling of accounts receivable and payable. Monitoring these factors can help understand the reasons behind changes in turnover days and take appropriate measures to improve capital utilization efficiency.

Please note that the above questions and answers provide general guidance; specific situations may vary depending on the company's industry, size, and operational model. For a more comprehensive understanding, it is recommended to further study the company's financial statements and related data before making an in-depth analysis.