Return on Capital Employed decreased by 1.2%, from 8% to 6.8% over the analysed period from 2016 to 2019. The decrease in Return on Capital Employed is mainly explained by lower EBIT margins despite an overall growth in net sales during the period. With EBIT margins decreasing on an aggregated level companies have been able to improve working capital which has mitigated the decrease in ROCE. However, within the sample of companies in the study there are major differences between the best and worst performers as the average working capital level is 6% lower for companies improving working capital for each year over the analysed period from 2016 to 2019.
Net working capital to sales lowest for larger companies
Nordea’s Working Capital Study 2020 shows that large companies have a lower level of working capital compared to smaller companies. This might be explained by overall better conditions, such as size, bargaining power and perhaps by a greater focus on working capital in order to maintain a low level. However, the study also shows that some smaller companies are able to perform just as well as the large ones and succeed in continuously improving their working capital levels.
Richard adds: “The data confirms a clear link between size and working capital, with the larger the company, the smaller the ratio of working capital and the smaller the company, the larger the ratio of working capital. Also, companies improved on average Days Payables Outstanding (DPO) to a higher extent than Days Sales Outstanding (DSO) over the period of study. This conclusion holds true, if we look at data by industry, size or region. The findings suggest that it is easier for a company to extend payment terms towards suppliers rather than customers.”