Days Working Capital

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What are 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 sales revenue. One may derive it from working capital and the annual turnover.

The formula is as follows:-

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

Key Takeaways

  • The day’s working capital is essential in evaluating a company’s performance. It shows how many days, ideally fewer, a company needs to turn its working capital into revenue. This ratio can be calculated using the company’s working capital and annual turnover.
  • The time to earn back investments in working capital through sales revenue is a crucial measure of operational efficiency. It indicates strong fund management and helps analysts assess company health.
  • It would help if one considered all its assets and liabilities to predict a company’s direction. Relying on only a few indicators could be misleading.

Important Definitions

Working Capital = Current Assets – Current Liabilities

Days-Working-Capital

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The formula for operating working capital is as follows:

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

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 and 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 calculating operating working capital.Examples of operating items areExamples 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, and 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 calculating operating working capital.

If there is a substantial presence of non-operating assets or liabilities in some organizations, or bifurcation for non-operating amounts is readily available, one could use this method.

The following example assumes 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 liabilities are non-operating. So, these are not considered for the calculation of operating working capital.

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Calculate Working Capital Video

 

Days Working Capital Examples

Below are examples of days working capital.

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

Example #1

Let us take the annual numbers of Microsoft Corp. as of 30th June 2019 to calculate the days working capital. Revenue of $ 125,843 million, Current Assets, current liabilities of $175,552 million, and $69,420 million, respectively.

Solution:

Below is given data for the 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 revenue in approximately 308.

Example #2

Let us 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 the given data:-

Calculation of Net Working Capital

Days Working Capital Example 2

Calculation of Net Working Capital

Example 2.1
  • =$180000-$100000
  • Net Working Capital = $80,000

Calculation of Days Working Capital

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

In the above example, as we can see, the working capital is 126 days, which denotes the company can recover its total invested working capital in 144 days.

Example #3

In the following example, we assume 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 liabilities are non-operating. 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

In the above example, as we can see, the working capital is 126 days, which denotes the company can 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 realize the revenue from sales. So, if the resultant number is lower, it is considered better.
  • This ratio helps the analysts consider the company with a better cycle of funds and the efficiency of the business’s operations.

Disadvantages

  • If we consider the result an absolute number, the ratio does not clearly explain anything. Because the days’ working capital varies from company to company and industry to industry, it heavily depends upon the nature of the business. For example, a company with a trading business would have a much lower ratio than 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 into the individual assets and liabilities items to measure their impact on the overall ratio. If we do not, 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 working capital ratio is 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. However, though it gives a clear picture of the organization’s capabilities to convert initial investments to the realization of revenue, it becomes difficult to understand due to the involvement of multiple variables.

Frequently Asked Questions (FAQs)

What does negative days working capital mean?

When a business’s current liabilities are more significant than its income and assets, it is considered to have negative working capital days. It is usually a temporary situation when the company makes a necessary purchase, such as buying more stock, new products, or equipment.

Is days working capital and cash conversion cycle the same?

The days working capital cycle refers to the duration required to convert current net assets (current assets minus current liabilities) into cash. On the other hand, the cash cycle represents the time taken to complete the purchase-to-sales process.

How can Days Working Capital be improved?

To improve Days Working Capital, companies can focus on optimizing their inventory management, accelerating accounts receivable collection, and effectively managing accounts payable. Implementing just-in-time inventory practices, offering discounts for early payment, and negotiating favorable payment terms with suppliers can help reduce DWC.

This article is a guide to Days Working Capital. Here, we discuss the days working capital calculation, formula, examples, advantages, and disadvantages. You can learn more about Excel modeling from the following articles: –

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