We begin with the story of See’s Candies. It is a California-based manufacturer and retailer of chocolates, founded in 1921. When it was up for sale in 1972, Berkshire Hathaway acquired the business for $25 million. The chocolate chain was making about $4 million pre-tax then. Though Buffett was hesitant initially, the purchase eventually went […]
We begin with the story of See’s Candies. It is a California-based manufacturer and retailer of chocolates, founded in 1921. When it was up for sale in 1972, Berkshire Hathaway acquired the business for $25 million. The chocolate chain was making about $4 million pre-tax then. Though Buffett was hesitant initially, the purchase eventually went through after he realised a couple of things. One, See’s enjoyed meaningful brand recall in California. Two, if people consumed/ gifted See’s premium chocolates in 1972, they would probably in 1982, too.
The investment paid off brilliantly and went on to make $2 billion in pre-tax earnings cumulatively, as Buffett put in Berkshire’s 2019 AGM. In the same meeting, he also admitted how acquiring See’s ‘opened his eyes to the power of brands’ and how Berkshire’s storied investment in Coca-Cola, in 1988, was partly influenced by See’s. While See’s brand recall may have tugged at his heart strings, what may have appealed to his brain was how See’s was efficient in terms of working capital. The chocolates were sold for cash and inventories were low as the product was fast-moving. He went on to call See’s ‘a dream business’.
That is the power of lean working capital. It can mean the difference between a business that is high on short-term borrowing cost and one that is not, between a business that generates its own growth capital and one that doesn’t and between a business that earns healthy paper (accounting) profits and the one that earns genuine cash profits. Yet, it is one of the parts that’s often overlooked in fundamental analysis. Here we look at the basics and explore a few cases on how you can draw insights from analysing working capital.
Working capital math
Typically, a working capital cycle or operating cycle looks like this.
Cash > raw materials + labour > finished goods > receivables from customers > cash
A business that churns its cash through more cycles in a year is considered efficient, because each cycle gives rise to revenue. More revenue could mean more earnings.
How is working capital calculated?
Net working capital or simply, working capital is computed at a point in time, using this formula.
Net working capital = Current assets – Current liabilities
Let’s explore the logic behind it. When a business purchases raw materials, cash (a current asset that yields interest earnings) turns into inventory (another current asset but no yield). While some of the raw material inventory is stored away as buffer, the rest is converted to finished goods — from one type of inventory to another. The finished goods when sold on credit, become receivables from customers — again another current asset. Not all finished inventory may find takers simultaneously and so, some remain unsold. When customers pay up, the sale is converted to cash again.
Further, like how the business extends credit to its customers, it may also enjoy credit from its vendors of raw material. This manifests as trade payables under current liabilities.
Thus, at any point in time, to keep the working capital cycle turning, a business is bound to have some cash locked in raw material inventory (buffer for the next manufacturing cycle), some in finished goods (unsold stock), some in trade receivables (collection not due yet) along with some cash kept aside to be deployed again. Working capital is the sum of cash locked in the above. At the same time, credit offered by vendors and employees free up some cash requirement and so, money owed to them is reduced from the above sum, to arrive at the net working capital (NWC) requirement.
There are also other elements of current assets apart from inventory, trade receivables and cash, such as ‘other current assets’. Similarly, apart from payables, there are also other elements such as borrowings and other current liabilities under current liabilities. You can apply the same logic as to whether they lock up cash or free up cash requirement. In a way, all elements of current assets lock up cash and all elements of current liabilities free up cash.
For example, prepaid expenses such as insurance premiums fall under other current assets. Here, the premium is paid upfront, and the coverage is received over the next 12 months. Advance received from customers falls under other current liabilities which frees up cash. Borrowings essentially mean that the company is using someone else’s cash and that its own cash is intact. But borrowings come at a cost.
Cycle days
The NWC of Cipla, for instance, as of FY26-end was ₹17,132 crore. That, in isolation, is not useful. But when it is given an appropriate denominator, it becomes useful for comparing two companies. The denominator here is revenue. Dividing Cipla’s NWC by its FY26 revenue of ₹28,163 crore gives 0.6 — which implies that for each rupee of revenue, Cipla requires ₹0.6 in NWC. This can also be expressed in days by multiplying by 365.
NWC days = NWC / Revenue x 365
Cipla’s NWC days come to 222 days, which means that the company managed to churn its NWC 1.6x (365/222) during FY26. Mankind Pharma, on the other hand, managed to churn its NWC 32x during FY26.
While you can use this formula, you must also be cognisant of the fact that certain elements that are specific to one company (working capital loans, provisions, advances from customers) and not to the other, can change the picture of working capital efficiency.
In the above example, though Mankind Pharma appears more efficient, its current liabilities were boosted by current borrowings. Current borrowings are 52 per cent of its current liabilities, while it is a mere 2 per cent for Cipla. Mankind’s finance costs are 4.5 per cent of revenue, Cipla’s are just 0.2 per cent of revenue. Often, current maturities of long-term debt (those instalments of long-term loans that are payable in the next 12 months) dominate current borrowings. As you can see, these are not working capital loans, per se.
Therefore, to compare the core working capital efficiency, you can use this formula.
Cash conversion cycle (CCC) days = Inventory days + Receivable days – Payable days
Inventory days = Inventories / Cost of goods sold x 365
Receivable days = Trade receivables / Revenue x 365
Payable days = Trade payables / Cost of goods sold x 365
This clearly breaks down the core components of WC and helps identify the ones that drag down WC efficiency clearly. A lower number relative to peers can signify the following:
* fast-moving inventory (lower inventory days) — can be due to demand for the product or efficient inventory management
* bargaining power with customers to demand early payment (lower receivable days)
* bargaining power with suppliers to pay later (higher payable days)
Even going by CCC days formula, Mankind is more efficient than Cipla (see graphic), as it is able to churn its stocks faster than Cipla. This is an example to highlight why working capital must be analysed in conjunction with CCC days as well.
Insights from working capital
Among other metrics in relative valuation, CCC days can be useful by helping determine whether a company’s valuation multiple warrants a premium or discount, based on its working capital efficiency relative to peers.
Besides, it can give good insights about a company’s business model. Look at the graphic.
Trent, V-Mart and Shoppers Stop are all apparel retailers. Their zero to minimal receivable days indicates that they operate on ‘cash and carry’ basis. Shoppers Stop’s negative CCC days indicates that its terms with vendors are highly favourable — it churns its inventory at least once before paying them. On the other hand, Trent and V-Mart appear to pay their suppliers before they can turn their inventory over once. Crisil’s rating rationale of Shoppers Stop confirms this. Over 70 per cent of the company’s turnover in FY26 was derived from merchandise procured on on sale-or-return (SOR) basis or returnable outright (ROR) basis, mitigating inventory risk from obsolescence.
Similar to Shoppers Stop’s high inventory days, in other retail, jewellery retailers, too, exhibit high inventory days as their showrooms are always stocked with a wide variety of articles for the customer to try on and choose from. Ethos, a retailer of watches, has inventory days at 222 days.
Given large amounts of cash locked in such inventory, a demand slowdown could pose a risk for such business models, especially when working capital is funded by short-term borrowings. This needs to be factored in valuing the companies.
Elsewhere, companies which derive revenue from government contracts run high receivable days. Receivable days of Data Patterns, Paras Defence and BEL are at 287, 278 and 170 days, respectively.
Companies typically maintain CCC days in a range over the long term, as their business models do not change dramatically. If you see a sharp change, investigate the causes. Per se, while high CCC days is not abnormal, given the nature of the business and customers (receivable days tend to be high if government is a customer), investors must observe if the CCC days are rising/ declining/ staying steady.
Relationship with debt
In some cases, while it may not be the management’s choice to fund working capital with borrowings, the business model happens to be inherently disadvantaged. Investors can stay away from such businesses if not comfortable with the risks.
Here’s an example.
Landmark Cars operates a car dealership. It can benefit from the underpenetrated 4-wheeler market in India. But, take a look at its CCC days. It’s low bargaining power with car OEMs is reflected in the low payable days and that is offset by low receivable days, which is fine. So far so good. However, it maintains a two-month inventory of vehicles. This must be funded by short-term borrowings (working capital loans) as the stock is cleared. Short-term borrowings make 36 per cent of the company’s balance sheet and the finance cost thereon is a drag on its already thin operating margin. An unexpected fall in demand could leave the company with unsold inventory, posing a threat to its almost non-existent profit margin.
Alternatively, you can choose to play the theme with an auto OEM. Maruti Suzuki is given here for comparison. Note how its receivable days of 11 days (comparable with Hyundai’s 11 days, Tata Motors’ 14 days, Mahindra’s 17 days) closely matches with Landmark’s payable days. Though Landmark does not sell Maruti’s cars, this analysis suggests that OEMs are setting the terms here. Maruti’s inventory days are more than offset by payable days, the result of its relationship with auto ancillary players. This leaves Maruti with a debt-free balance sheet and better net margins, giving it greater resilience during a downcycle.
Relationship with cash flows
We now turn to the most important bit of this article: the relationship between working capital and cash flow. It is easy for a company to boost sales through lenient credit terms and report accounting profits, but generating genuine cash profits is harder. Ultimately, a company’s worth reflects the present value of its cash flows, not its accounting profits.
To see where working capital fits in the equation with cash flows, we need to look at the formula for operating cash flows (OCF).
OCF = EBIT (1-tax rate) ± NWC changes + Depreciation ± Non-cash, non-operating items
If NWC change is positive, it could add to the cash flows; if negative, it can drag cash flows.
To get NWC changes, compare the current year balance of each item of current assets and current liabilities (except cash) with its previous year balance. The rule is if the value of a current asset is higher now than earlier, then write down the difference with a minus sign and vice-versa. Similarly, if the value of a current liability is higher now than earlier, then write down the difference with a plus sign and vice-versa.
The graphic contains a hypothetical case of three identical companies, with how they manage working capital being the sole differentiating factor.
Company C with the leanest working capital of the three, ends up with a free cash flow of ₹80 crore, while A with the poorest WC management makes the least free cash flow of the three at ₹35 crore. B’s neutral NWC changes aids it post a better free cash flows than A’s.
If C maintains its lean working capital model, its discounted cash flow valuation would far exceed that of A and B, other things being equal. Further, higher OCF can help C rely on internal cash flow accretion for growth capital, while A may have to borrow or raise equity capital — both of which can dilute EPS.
Finally, there could be cases where positive operating cash flows (OCF) before NWC changes can turn negative or abysmally lower after NWC changes. For instance, a company may stock up on imported material if it foresees supply-chain disruptions. Check if the situation reverses subsequently. If it doesn’t, be conservative in valuation.
Here’s the real-life example of Kaynes Technology.
The company’s NWC changes in FY25 dragged OCF from positive to negative, primarily driven by a rise in receivables (including from the government). The trend failed to reverse but contidnued stronger in FY26, with receivable days doubling. CCC days nearly doubled, too, consequently. This has partly weighed on the stock. From its 52-week high of ₹7,705 in October 2025, it has fallen 54 per cent to ₹3,511 now and its P/E multiple has declined from 137x then to 68x now. Whether cash flows improve from here needs a close watch.
Published on September 19, 2026
