Growth in itself only generates value if the return on new invested capital (RONIC) exceeds its required return. If this is not the case, the business will destroy value in the long run. In other words, the company only generates value through its business and only if the return on invested capital (ROIC) is higher than the cost of capital (WACC). Working capital efficiencyĭepending on the nature of the business, and hence the business model, working capital efficiency may be a very relevant component when examining the return on invested capital generated by the business, which ultimately determines whether the company creates value through its business. In other words, business ties up working capital. Product sales results in accounts receivable for the company and procurement of products for sale results in accounts payable. When a company sells physical products, for example, it needs some sort of inventory to meet demand. The company expects to generate revenue for each invested euro. This can include purchasing inventories, building a new factory, hiring new employees, or investing in R&D projects. Before looking at the issue at hand, I think it is worth specifying why it is important for investors to monitor working capital and its efficient use.įor the company to be able to generate cash flow to shareholders through its business it must invest in capacity to produce products and services intended for sale.

Operational working capital turnover