Thread: Working Capital Cycle (Operating Cycle)

The book definition of WCC refers to number of days required for the entire process of business from the purchase of raw material to the realization from the customers.
Let us, deep-dive, into the process and understand how we can apply this in the analysis of a company.
Eg: A Footwear Manufacturer:

As the image above shows, first, the company procures raw material (rubber) and starts processing it to derive the final product that is Footwear.
The process involved is known as Work-in-progress and the final product is called Finished Goods. Once the raw material is converted into finished goods, they are sold to customers which concludes the Sales part of the cycle.
The last part of the cycle is dealing with the realizations from customers i.e. recovery from debtors (Cash). Once the cash is received, the cycle is complete. There is one more piece to this puzzle,
as we are buying raw material from some other company, we will also receive some credit period for the same. These period/days are to be reduced from the above days to arrive at Working Capital Cycle.
Eg: Let us say a process requires 15 days to covert raw material to finished goods and another 10 days for the goods to be sold. Also, the company allows 30 days credit period to customers and receives a 15 days credit period from its supplier.
The WCC comes to 40 Days (15+10+30-15). i.e. It takes company 40 days to rotate and entire operating cycle.

TIP: Lower the number of days required to complete the entire cycle better it is for the company. Always look for companies with the least possible working capital cycle.

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with Finsense Gurukul

Finsense Gurukul Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @FinsenseG

9 Oct
Thread: Debt Service Coverage Ratio (DSCR)

One way to judge the strength of a company is to check its ability to pay current outside obligations (interest+principal) from the income generated during the year. DSCR is an important ratio used by banks and financial institutions Image
Let's understand DSCR in depth.
Debt Service Coverage Ratio is calculated by dividing Net Operating Income (alternatively EBITDA) by Total Debt service costs. Debt service costs include interest to be paid on all existing loans along with the principal repayments during the year.
Let's take an example: A Ltd. has EBITDA of Rs. 200 crores during the current year. It has to repay Rs. 50 crores to lenders (Rs. 45 crores as principal and Rs. 5 crores as interest).
DSCR = Rs. 200 crores/Rs. 50 crores i.e. 4 Times.
Read 5 tweets
7 Aug
Thread: Bonus issue and it's effect on stock prices

Bonus as the word suggest refers to something that is received without consideration or price. A company may reward it's shareholders in form of cash payouts (dividends) or stock payouts (bonus issue).
Bonus issue is carried out by company having huge amount of free reserves that can be capitalized. Eg: A company has been making profits and accumulated free reserves. These reserves can be used to issue bonus shares which converts them into share capital.
Let us say a company has Rs. 1,00,000 of share capital and Rs. 1,00,000 in reserves and surplus. Company has 10,000 shares outstanding of face value Rs. 10 each.
If the company decides to issue a bonus of 1:1 (1 share in bonus for 1 share held),
Read 6 tweets
4 Aug
Thread: Depreciation: Why is it important?

A business requires assets to operate and generate profits. These assets like Plant & Machinery, Equipment, Furniture etc are used to run the business.
When a business purchases assets, they are used for longer duration. Eg: If a company purchase a machinery, It may be used in business for 10-15 years. Since the usability of asset is more than 1 year, the same cannot be treated as expense in 1 year and shown in P&L Statement.
But this machinery will become obsolete after 10-15 years, So how to provide impact of such obsolence?
By charging a certain amount to Profit & Loss statement every year in form of Depreciation.
Read 5 tweets
3 Aug
Thread: Cash Flow Gimmick!

As we all know the Cash Flow Statement (CFS) shows the movement of cash in and from the company in a current period. However we need to have some eye for detail to check if there is anything unusual going on with the business.
Let us take an example of a company that is growing sales at a decent pace. usually it should have growing cash flows too at around same pace. However, What could go wrong?
So if a company focuses too much on growing it's topline (sales) in order to report growth in numbers, there are chances that it might not be able to efficiently collect money from it's receivables (debtors). i.e. It might have to offer extended credit to customers
Read 8 tweets
31 Jul
Thread: Free Cash Flows and It's importance

We hear this thing a lot times where analysts/management talks about free cash flows generated by the company. Well let us help you out with this concept today.
When a company sells it's products and services, It get paid in form of cash. This cash is used for running the business i.e. paying to suppliers, salary to employees, taxes to government, purchase of fixed assets & dividends to shareholders.
A company needs to invest large amounts of cash into purchase of fixed assets to grow the business. Here comes the concept of free cash flow (FCF).

FCF is the cash generated by company from it's operating activities after reducing the amount spent on purchase of fixed assets.
Read 6 tweets
30 Jul
Thread: Cash Flow Statement

As we all know that Financial statements of company consists of 3 main things: Balance Sheet, Statement of Profit & Loss & Cash Flow Statement.
Cash flow statement (CFS) as the name suggests is a statement which shows the flow of cash or movement of cash from and within the business.
Let us deep dive into it.

There are 3 main activities of CFS: Operating activities | Investing activities | Financing activities.
Operating Activities: These are primary business activities. Eg: For an FMCG company, cash generated from sale of it's products or receivables from its customers will come under cash flows from operating activities. (receipt of payment from debtors,
Read 7 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!