Research analysing the performance of 1,000 of Europe’s largest listed companies finds that while their performance improved marginally in 2011, they still have about €886bn (US$1.09trillion) in excess working capital which equates to about 9.4% of EU gross domestic product (GDP).
The research, from working capital consultancy REL, a division of The Hackett Group, ranked the companies by sales in key areas including receivables, payables, inventory, debt, and cash on hand. It found that major European corporates are turning away from the strategy of hoarding cash, a practice that emerged at the start of the 2008-09 recession and peaked earlier this year, and are increasing investment in anticipation of growth and reducing cash on hand. However, they are continuing to take advantage of low-cost loans, with the analysis highlighting an increase in debt levels.
Overall, working capital performance has improved less than 2% since 2010, with the majority of the improvement coming from faster collections. Total debt increased by €95bn year-on-year, and cash on hand decreased by €60bn after hitting record highs in 2010.
“With capital expenditure increasing we’re reaching a real danger point,” said Gavin Swindell, managing director of REL UK. “Due to low interest rates we’re going back to financing working capital which means taking on more debt, more leverage and the whole cycle repeats itself.
“Despite some minimal improvement in working capital performance, we haven’t seen any indication that companies can actually generate sustainable improvement in the key areas of receivables, payables, and inventory; 69% have not been able to maintain their working capital performance over a three-year period, without deteriorating by more than 5%.”
According to the research, top performers operate with more than half the working capital of typical companies. They collect from customers nearly 16 days faster, pay suppliers nearly 17 days slower, and hold nearly 70% less inventory. But even among those companies that have managed to improve working capital performance, none managed to improve all three elements over three years.
This is partly because companies have focused less on improving their internal cash position as sales have increased. Companies boosted their revenues by 10.7%, while net working capital increased by 8.8%; comparable to 2007-08 figures. Companies are also re-investing the money in anticipation of growth; capital expenditure (capex) increased by 7% and is above pre-recession levels.
“Companies will have to generate the cash internally to sustain the levels of investment that they have started,” said Swindell. “It’s fine to take on cheap debt, provided they have confidence in their revenue streams and the 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.”
issued last month by PricewaterhouseCoopers (PwC) found that poor working capital management cost top European companies around £400bn (€510bn).
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