Days Working Capital
DEFINITION of 'Days Working Capital'
Days working capital is an accounting and finance term used to describe how many days it takes for a company to convert its working capital into revenue. It can be used in ratio and fundamental analysis. When utilizing any ratio, it is important to consider how the company compares to similar companies in the same industry.
BREAKING DOWN 'Days Working Capital'
Working capital is a measure of liquidity, and days working capital is a measure that helps to quantify this liquidity. The more days a company has of working capital, the more time it takes to convert that working capital into sales. In other words, a high number is indicative of an inefficient company and vice versa.
Working capital is calculated by subtracting current liabilities from current assets. Current assets include cash, marketable securities, inventory, accounts receivable and other short-term assets to be used within the year. Current liabilities include accounts payable and the current portion of long-term debt. These are debts that are due within the year. The difference between the two represents the company's short-term need for, or surplus of, cash. A positive working capital balance means current assets cover current liabilities. A negative working capital balance means current liabilities are more than current assets.
While negative and positive working capital measures provide a general overview of working capital, days working capital provides analysts with a numeric measure for comparison. The ratio provides analysts with an average for the number of days it takes a company to convert working capital into sales.
Interpreting Days Working Capital
The formula for days working capital is the product of average working capital and 365 divided by annual sales. For example, if a company makes $10 million in sales and has working capital of $100,000, the days working capital is calculated by multiplying $100,000 by 365 and then dividing the answer by $10 million. The answer is 3.65 days. However, if the company makes $100 million in sales the answer is 0.365 days.
An increased level of sales, all other things equal, produces a lower number of days working capital because more sales means the company is converting working capital to sales at a faster rate. A company with a days working capital ratio of 3.65 takes 10 times more time to turn working capital, such as inventory, into sales than a company with a days working capital ratio of 0.365. Another way to interpret this is the company with a days working capital ratio of 0.365 is 10 times more efficient than the company with a days working capital ratio of 3.65. While the company with the higher ratio is generally the most inefficient, it is important to compare against other companies in the same industry as different industries have different working capital standards.