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  •     QAD Glossary

  • Return on Working Capital
    The Return on Working Capital (ROWC) KPI is a measure of profit on the amount of cash consumed. It is a method of increasing enterprise value by maximizing efficiency of working capital. Every dollar of EBITDA added to the bottom line is worth five or more dollars to investors in enterprise value. Because working capital efficiency has direct effect on EBITDA, having a maximum return on working capital is a key lever to increasing enterprise value.
    Note: EBITDA, which is an indicator of a company’s financial performance, is net income before interest, taxes, depreciation, and amortization. It can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.
    EBITDA is calculated as follows:
    EBITDA = Revenue - Expenses (excluding tax, interest, depreciation, and amortization)
    The ROWC ratio is calculated as follows:
    Return on Working Capital (ROWC) = NOPAT / Working Capital
    Net Operating Profit After Tax (NOPAT) = EBIT – Operating Income Tax
    Earnings Before Interest and Tax (EBIT) = Net Sales – COGS – Other OPEX
    COGS = Cost Of Goods Sold
    OPEX = Operating Expenditures
    Working capital, also known as net working capital or working capital ratio, is a measure of both a company’s efficiency and its short-term financial health. The working capital ratio is calculated as:
    Working Capital = Current Assets - Current Liabilities
    Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets, which consist of cash, accounts receivable, and inventory.
    If a company’s current assets do not exceed its current liabilities, then it can run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer period could also be a red flag that warrants further analysis. For example, a declining working capital ratio could be caused by declining sales volumes and, as a result, causes the accounts receivables number to continue to get smaller.
    Working capital also gives investors an idea of the company’s underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company’s obligations. If a company is not operating in the most efficient manner, also known as slow collection, the working capital increases. Slow collection, which can be seen by comparing the working capital from one period to another, can signal an underlying problem in the company’s operations.
    The Return on Working Capital for the Last 12 Months chart is linked to a grid that shows the return on working capital details.

    Navigation Overview for the Return on Working Capital KPI
    Return on Working Capital for the Last 12 Months Chart
    This chart shows the ROWC metric for the last 12 months for the entity and currency type that you select from the parameter bar.
    Note: The source for this chart is the GL Report Line Fact table.

    Return on Working Capital for the Last 12 Months Chart
    Return on Working Capital for the Last 12 Months Grid
    This grid, which shows the amounts used to calculate the ROWC ratio, contains the following columns:
    Fin Month
    Fin Month Name
    Currency Type
    Entity Code
    Working Capital
    Return on Working Capital ratio

    Return on Working Capital for the Last 12 Months Grid