Turning The Tide

Companies are becoming more efficient, paring working capital needs on lower commodity prices and inflation.

- Niti Kiran

Corporate India has been grappling with slowing economic growth, mounting NPAS of banks, after effects of demonetisation, among a host of other challenges. But amidst the gloom there is finally some good news. There is a healthy trend of companies steadily improving their operational efficiency, reveals an analysis of 387 companies in the BSE 500 index. The sample excludes banks and financial institutions and only includes companies whose latest data for 2016/17 is available with the Ace Equity database. It was observed that a significant number of companies saw a decline in their cash conversion cycle over the period of five and three years. To be precise, around 9 and 34 per cent companies saw a consistent decline in their cash conversion cycle over the past five and three years, respectively. The average of the cycle has hovered in the range of 56 and 58 days over the five year period.

A cash conversion is the time taken by a company to receive payment for its products after it has paid for its inventory. It is derived by adding days inventory outstanding to the days sales outstanding and subtracting the days payable outstanding. This calculation attempts to measure how much of a company’s cash flow is tied up during each transaction. Thus, a lower cash conversion cycle is always desirable.