In this report, we examine how Japanese listed firms have fared in their working capital management over the years and how enhancing treasury management can improve both the profitability and balance sheet efficiency to help them generate more value for their shareholders.
The report examines the return on capital employed (ROCE) performances over the past five years, and captures trends from the Working Capital Index, Cash Index and Cash Conversion Cycles (CCC) of the Nikkei 225 companies compared to their S&P 1500 counterparts from 2011 to 2020.
What is return on capital employed?
Return On Capital Employed (ROCE) measures a company’s ability to generate profits on the capital deployed in the business and it has two major components: operating income and capital employed. ROCE is calculated as follows:
ROCE = EBIT(1-tax) / (Average total debt of last two calendar years + Average book value of equity of last two calendar years)
What is a cash conversion cycle?
Cash Conversion Cycle (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 cash conversion cycle (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
Key takeaways at a glance
$139B Estimated working capital that can be released across Nikkei 225 companies
ROCE 2020 Performance 3.9% Average Nikkei 225 company 7.2% Average S&P 1500 company
CCC 2020 Performance 104 days Average Nikkei 225 company 77 days Average S&P 1500 company
Days sales outstanding (DSO) 2020 Performance 77 days Average Nikkei 225 company 54 days Average S&P 1500 company
Days payable outstanding (DPO) 2020 Performance 68 days Average Nikkei 225 company 52 days Average S&P 1500 company
Days inventory outstanding (DIO) 2020 Performance 95 days Average Nikkei 225 company 75 days Average S&P 1500 company
Improvements to cash and working capital levels can significantly boost the ROCE of Nikkei 225 companies by 0.8 percent.
Treasury can help improve ROCE for Japanese companies by focusing on three key pillars:
- Establishing a globally integrated and centralized treasury
- Embracing digitization to automate processes
- Optimizing liquidity and working capital to free up trapped cash
To learn more about benchmarking and optimizing global working capital, please contact your J.P. Morgan representative.
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