Days Working Capital

What is Days Working Capital?

Days Working Capital is a vital ratio considered for fundamental analysis of the company, which indicates the number of days (lower the better) a company requires to convert its Working Capital into the sales revenue. It is derived from Working Capital and the annual turnover.

The formula is as follows:

Days Working Capital Formula = (Working Capital * 365) / Revenue from Sales.

Important Definitions

Days-Working-Capital

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For eg:
Source: Days Working Capital (wallstreetmojo.com)

The formula for Operating Working Capital is as follows:

Operating Working Capital = (Operating Current Assets – Operating Current Liabilities)

A few examples of operating items are Fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more; Plant and Machinery (involved in the production), Inventories, Trade Payables & Receivables, Cash blocked for operating purposes, etc. Cash earmarked for investments, Marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more, and other such assets or liabilities would not be considered for calculation of Operating Working Capital.

In some organizations, if there is a substantial presence of Non-Operating assets or Liabilities, or bifurcation for non-operating amounts is readily available, this method could be used.

In the following example, we are assuming that Other Current AssetsCurrent AssetsOther current assets refer to the category of assets which record all the uncommon and insignificant assets readily convertible into cash and doesn't fit in any common current assets categories like cash & cash equivalents, inventory, trade receivables, etc.read more and Other Current Liabilities are non-operating in nature. So, these are not considered for the calculation of Operating Working Capital.

Days Working Capital Examples

Below are the examples of days working capital.

You can download this Days Working Capital Excel Template here – Days Working Capital Excel Template

Example #1

Let’s take the annual numbers of Microsoft Corp. as on 30th June 2019 for the calculation of the Days Working Capital. Revenue of $ 125,843 million, Current Assets, and Current Liabilities of $175,552 million, and $69,420 million, respectively.

Solution

Below is given data for calculation of days working capital

  • Revenue: $125,843
  • Current Assets: $175,552
  • Current Liabilities: $69,420

Calculation of Working Capital 

Days Working Capital Example 1.1

Working Capital = Current Assets – Current Liabilities

  • = $175552-$69420
  • = $106132
Days Working Capital Example 1.2
  • =($106,132 * 365) / $125,843 million
  • = 307.83 days.

It indicates the entity’s ability to convert the working capital to the Revenue in approximately 308.

Example #2

Let’s take into consideration the following figures and calculate Days Working Capital. Revenue for the particular period is $ 2,00,00,000. Take 360 days in your calculation.

Solution

Below is given data –

Days Working Capital Example 2

Calculation of Net Working Capital

Example 2.1
  • =$180000-$100000
  • Net Working Capital = $80000

Calculation of Days Working Capital

Days Working Capital Example 2.2
  • =($80000*360)/$200000
  • = 144 days

Here in the above example, as we can see, the Days working Capital is 126 days, and that denotes the company has the ability to recover its total invested working capital in 144 days.

Example #3

In the following example, we are assuming that Other Current AssetsCurrent AssetsOther current assets refer to the category of assets which record all the uncommon and insignificant assets readily convertible into cash and doesn't fit in any common current assets categories like cash & cash equivalents, inventory, trade receivables, etc.read more and Other Current Liabilities are non-operating in nature. Revenue for the particular period is $ 2,00,00,000. Take 360 days in your calculation. Calculate Days and Net Operating Working Capital 

Solution

Below is the given data –

Example 3

Calculation of Operating Working Capital

Days Working Capital Example 3.1
  • =$150000-$80000
  • Operating Working Capital = $70000

Calculation of Days Working Capital is as follows –

Example 3.2
  • =($70000*360)/$200000
  • = 126 days

Here in the above example, as we can see, the Days working Capital is 126 days, and that denotes the company has the ability to recover its total invested working capital in 126 days.

Advantages

  • It is a good indicator of the operational efficiency of the company. It entails the number of days the company would require to realize its initial investments in the working capital to realizations from the revenue from sales. So, if the resultant number is lower, it is considered better.
  • This ratio helps the analysts to consider the company with a better cycle of funds along with the efficiency of the operations of the business.

Disadvantages

  • The ratio does not clearly explain anything if we consider the result as an absolute number. Because the Days to working capital varies from company to company and industry to industry. Also, it heavily depends upon the nature of the business. For example, if a company has a trading business, it would have a much lower ratio in comparison to the businesses involved in the manufacturing process.
  • It is also challenging to predict the correct direction of the company because it involves multiple variables in the numerator, such as various current assets and liabilities. To get the real picture, we need to dig deeper and to go to the individual items of Assets and Liabilities to measure its impact on the overall ratio. If we don’t do that, it is quite possible that one or two heavyweight indicators could manipulate the ratio and reflect the non-fair picture.

For instance, The ratio could be lower because of the following reasons:

Conclusion

Overall, the Days Working Capital Ratio turns out to be an essential measure for checking the efficiency and effectiveness of capital investment in the operating process of the business. It helps the investors/analysts to compare the companies of similar standing based on better usage of funds and operating cycle. Though it gives a clear picture of the capabilities of the organization to convert initial investments to the realization of Revenue, it becomes difficult to understand due to the involvement of multiple variables.

This article has been a guide to Days Working Capital. Here we discuss the calculation of days working capital along with its formula, examples, advantages, and disadvantages. You can learn more about excel modeling from the following articles –

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