Understanding Days in Working Capital
Days in Working Capital measures the liquidity and efficiency of the company, which indicates how many days a company takes to convert its working capital into sales revenue. A well-established company of a mature industry is likely to have less number of days in working capital. It is calculated as Working Capital divided by Total Revenue multiplied by 365 days.
The formula to derive Days in Working Capital
Working Capital - It is also known as net working capital, and it measures the company's short-term liquidity and efficiency position. It is calculated by subtracting current assets and current liabilities, and it is found in the company's Balance Sheet.
Total Revenue - It indicates how much a company's revenue is before deducting any expenses. Total revenue is found in the company's Income Statement.
Example of Days in Working Capital: For the financial year, Apollo Micro Systems reported Working Capital as Rs. 220.51 Cr. and Total Revenue as Rs. 10560.01 Cr.
The value as per the formula (Working Capital / Total Revenue x 365) is calculated as (220.51 / 10560.01) = 7.62.
Key Highlights
Days in Working Capital measures how many days a company takes to convert its working capital into sales revenue.
It is calculated as Working Capital divided by Total Revenue multiplied by 365 days.
The lower number of days in working capital is considered good. It indicates that the company is quickly converting its working capital into sales, or also it can be due to the increase in sales.
Compared companies in the same industries as days in working capital vary from one industry to another.
While looking at the Days in Working Capital, the following points should also take into consideration:
The lower number of days in working capital is considered good. Most efficient companies took a minimum day to convert their working capital into revenue. It indicates that the company is quickly converting its working capital into sales, or also it can be due to the increase in sales.
The maximum number of days in working capital indicates the company's sales are decreasing or the company is taking more time to convert its working capital into revenue. The company that takes minimum days is better than the company that takes more days.
An increase in working capital days may indicate that the company's sales are decreasing. And opposite to this decrease in the number of days in working capital can be due to increasing sales revenue.
How to use Days in Working Capital effectively
Investors should look for companies with a minimum number of days of working capital. It indicates that the company is efficient in converting its working capital into revenue.
While analyzing, the company also looks at its historical performance. If the company's working capital days are decreasing, it can be due to an increase in sales revenue. And opposite to this if the days in working capital are increasing, it may suggest that the company's sales revenue is decreasing.
Compared companies that operate the same industries because the number of days for converting working capital into revenue differs from industry to industry.
For better analysis, we must look at other financial metrics with Days in Working Capital such as
Operating Cycle,
Inventory Days,
Account Receivable Days, etc.,
