Research Suggests European Companies Could Improve Working Capital Performance

European companies still have a tremendous opportunity to improve their working capital performance, with an estimated €886bn of working capital opportunity that remains undeveloped, suggests research by working capital consultancy REL. The figure, equivalent to 9.4% of the EU’s gross domestic product (GDP) comprises 36% from receivables, 32.5% from inventory and 31.5% from payables.

REL’s annual review of the top 1,000 companies across the EU finds that coming out of the recession, companies increased their revenues by 10.7% and net working capital by 8.8%. Days of working capital (DWC) improved marginally by 0.7 days and most of the improvements are coming from improvements from days sales outstanding (DSO).  However, there is considerable scope for further improvement.

The research omits the performance of companies in the oil and gas sector, whose performance REL says is very volatile and dependent on the oil price, and finds that companies have deteriorated in their working capital performance by 0.1 days in the past year, or by 0.8%. Days inventory outstanding (DIO) deteriorated year-on-year, while DSO and days payable outstanding (DPO) showed a slight improvement. “There is still a significant opportunity of €794bn,” according to REL. Efficiency of companies decreased in 2011 when compared to 2010. Operating expenses increased by 10%, gross margin decreased by 1.2% and profitability decreased by 0.04%.

REL also finds that companies have continued to take advantage of the low interest rates and accumulate more debt and improve their cash position. Total debt increased by €95bn year-on-year, although cash on hand decreased by €60bn over the same period.

The agency concludes that EU companies are re-investing the money back in anticipation of growth, with a 7% increase in capital expenditure taking it above its pre-recession level. “Companies will have to generate the cash internally, to sustain the levels of investment that they have started,” according to REL. “It is fine to take on cheap debt, provided that companies have the confidence in their revenue streams and their ability to pay it off. If companies’ revenue streams do not materialise and their debt positions have increased, they will be in the same position that they were pre-crisis.”


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