By Gourang Shah
Global Head of Treasury and Working Capital, J.P. Morgan Wholesale Payments
By Dennis Santa Paula
Global Energy Solutions, Wholesale Payments
By Kevin Montoya
Advisor, Solutions, Latin America J.P. Morgan
By Gourang Shah , Dennis Santa Paula , Kevin Montoya
J.P. Morgan’s 2021 Latin America Working Capital Index provides treasury and finance professionals with insight into the working capital performance of Latin American companies in the past year. We also assess the impact of the global pandemic across industries and identify ways companies can better manage liquidity risks going forward.
The index reveals trends from the working capital index, cash index and cash conversion cycles (CCC) of Latin American corporates across Argentina, Brazil, Chile, Colombia, Mexico and Peru in addition to comparisons to the S&P 1500 from 2012 to 2020.
CCC helps in quantifying how efficiently a company is managing its working capital. It measures the amount of time it takes to convert inventory purchases into cash flows. CCC is represented as:
The CCC is the number of days it takes to convert inventory purchases into cash flows from sales. The CCC is a metric that helps quantify the working capital efficiency of a company and is derived from three different components:
Days Sales Outstanding (DSO) or the number of days taken to collect cash from customers
Days Inventory Outstanding (DIO) or the number of days the company holds its inventory before selling it
Days Payable Outstanding (DPO) or the number of days from the time a company procures raw materials to payment to suppliers
$51 B Estimated working capital that can be released across Latin America companies
Colombia: 18.7 days; Maximum deterioration in CCC (2020 from 2019)
Brazil: $18.9B; Maximum liquidity trapped inworking capital
11.5%; Maximum increase in cash levels in the last eight years
Top three industries showing deterioration in CCC from 2019 (number of days the CCC lengthened by)
Auto & auto parts: 43.5 days
Entertainment: 32.2 days
Media: 25.5 days
Top three industries showing improvement in CCC from 2019 (Number of days the CCC shortened by)
Airlines: 16.7 days
Industrial Machinery: 9.7 days
Industrials: 1.0 days
Top three industries showing increase in cash levels from 2019
Cash Conversion Cycle Days Inventory Outstanding
7.4 days jump in average CCC of Latin American companies from 2009
Days Inventory Outstanding
8.2 days deterioration in DIO from 2019
To learn more about benchmarking and optimizing global working capital, please contact your J.P. Morgan representative.
Source: Capital IQ
Note: Calculation assumes that every company’s DSO, DPO and DIO improves to the next quartile
Investments or strategies discussed herein may not be suitable for all investors. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur in any responsibility or liability whatsoever to the Company or any other party with respect to the contents of any matters referred herein, or discussed as a result of, this material. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice or investment recommendations. Please consult your own tax, legal, accounting or investment advisor concerning such matters.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of J.P. Morgan, its affiliates, or its employees. The information set forth herein has been obtained or derived from sources believed to be reliable. Neither the author nor J.P. Morgan makes any representations or warranties as to the information’s accuracy or completeness. The information contained herein has been provided solely for informational purposes and does not constitute an offer, solicitation, advice or recommendation, to make any investment decisions or purchase any financial instruments, and may not be construed as such.
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