REL analysts attribute Europe’s better performance last year in part to currency and outsourcing trends. Many European firms have been quicker than their U.S. counterparts to source low-cost goods from Eastern Europe and Asia, says REL analyst Karlo Bustos. That has driven down the value of inventories on their books (thanks in part to faster transit times than U.S. firms experience). So has the strength of the euro against the U.S. dollar, since goods sourced in Asia are typically priced and sold in dollars. All that helps to explain why last year, the largest 1,000 companies in Europe, excluding automakers, reduced their days inventory outstanding by 4.6 percent, versus a 2.1 percent increase for their U.S. counterparts. — R.M.
How Working Capital Works
Days Sales Outstanding: AR/(total revenue/365)
Year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by one day of average revenue.
A decrease in DSO represents an improvement, an increase a deterioration. In the accompanying charts, companies marked with an asterisk have securitized receivables, which improve DSO through financing alternatives without improving the underlying customer-to-cash processes such as credit-risk assessment, billing, collections, and dispute management. The scorecard eliminates this distortion by adding securitized receivables back on the balance sheet before calculating DSO.
Days Inventory Outstanding: Inventory/(total revenue/365)
Year-end inventory divided by one day of average revenue.
A decrease is an improvement, an increase a deterioration.
Days Payables Outstanding: AP/(total revenue/365)
Year-end trade payables divided by one day of average revenue.
An increase in DPO is an improvement, a decrease a deterioration. For purposes of the survey, payables exclude accrued expenses.
Days Working Capital: (AR + inventory – AP)/(total revenue/365)
Year-end net working capital (trade receivables plus inventory, minus AP) divided by one day of average revenue.
The lower the number of days, the better. The percentage change is marked N/M (not meaningful) if DWC moved from a positive to a negative number or vice versa. Also, when a company has a negative DWC, an improvement will show up in our chart as a positive percentage change from 2005 to 2006.
*Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DIO. Our methodology, however, uses net sales across the four working-capital categories to allow a balanced comparison. Reported sales have been adjusted for acquisitions and disposals during the year.
This year’s survey uses the Global Industry Classification Standard (GICS) to categorize companies. Results from past years have been recalculated for consistency.