Investing in working capital management

Companies with efficient working capital management have always rewarded shareholders

Source: FE

Successful investors have always given a lot of thrust on working capital management. A study of top Indian companies with high return on capital employed (ROCE) shows that many of these companies have operated on negative working capital management. These companies are known to give good returns to their shareholders, both in terms of dividends and capital gains. Interestingly, most of these companies belong to the FMCG or the auto sector.

Of the 30 stocks in the Sensex, seven stocks have negative working capital and ROCEs in the range of 20-80%. The total market capitalisation of these companies has moved up by 94% as against the entire Sensex, which moved up by 67% over the last one year.

Industries like steel and cement, which are working capital-intensive, may not show high ROCEs on account of high capital costs. But some companies have begun to show negative working capital. A better credit management system will help these companies generate higher ROCEs in the long run.

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