A distributor grows revenue 30% and reports its best year. Its bank calls in March to say the working capital limit is fully drawn.
Nothing has gone wrong. That's the uncomfortable part. Growth consumes cash, and the amount it consumes is measurable in advance from three numbers that every annual report discloses.
The three components
Inventory days. Inventory divided by cost of goods sold, times 365. A distributor holding ₹780 crore of stock against ₹3,900 crore of cost of goods sold carries 73 days.
Use cost in the denominator. It's a common mistake to use revenue, and it understates the figure.
Receivable days. Receivables divided by revenue, times 365. ₹640 crore against ₹4,800 crore of revenue is 49 days.
Payable days. Payables divided by cost of goods sold, times 365. ₹540 crore against ₹3,900 crore is 51 days.
The operating cycle is inventory days plus receivable days, which here comes to 122 days from buying material to collecting cash. The cash conversion cycle subtracts the credit suppliers extend: 71 days.
That 71 days is the period the company has to fund itself. The 51-day gap between the two figures is the free funding suppliers provide.
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What the cycle costs
The arithmetic fits on one line, and it's worth doing with real numbers.
A company with ₹4,800 crore of revenue and a 71-day cycle that grows 30% needs to fund an additional ₹280 crore of working capital in that year, before it has collected a rupee of profit on the new sales.
Take the revenue increase, multiply by the cycle in days, divide by 365. ₹1,440 crore of new revenue times 71 over 365 is ₹280 crore. That's money the company has to find before the new sales have paid it anything.
That money has to come from retained profit, from a bank, or from suppliers. If the company's profit after tax on the incremental revenue is less than ₹280 crore, growth is cash-negative. The gap is borrowed. So fast-growing companies with real profits run out of cash, and it's one of the commonest ways a good business fails.
Why the cycle can be negative, and what that means
A supermarket sells for cash in a fortnight and pays suppliers in 60 days. Its cycle is roughly minus 45 days.
For that business, growth generates cash. Every new store funds part of its own working capital from the day it opens, because the customers pay before the suppliers do.
That structural difference explains most of why organised retail can expand quickly on modest capital while a capital-goods business expanding at the same rate needs a rights issue. No margin advantage is needed to explain it. The same growth rate therefore means completely different things in the two sectors. Compare their capital requirements without looking at the cycle and you reach the wrong conclusion.
Negative cycles occur wherever the customer pays before the supplier does: supermarkets, quick-service restaurants, subscription software, insurance and airlines that sell tickets in advance.
Where to find the numbers in an Indian annual report
Inventory, trade receivables and trade payables are all on the face of the balance sheet, with notes breaking each into components.
Cost of goods sold isn't a line in an Indian statement, because expenses are presented by nature. Build it by adding cost of materials consumed, purchases of stock-in-trade, and changes in inventories of finished goods and work in progress. That sum is the equivalent.
Use average balances where the year-end figure moved a lot, since a company that acquired a business in March has a closing balance that never participated in the year's trading.
And where revenue is seasonal, compute receivable days on the last quarter's revenue annualised. A March-quarter push disappears into a full-year average.
The three ageing disclosures that turn the ratio into a finding
The ratio tells you the average. The ageing schedules tell you the distribution, and the information is in the distribution.
Receivables ageing is now presented in fixed buckets in Indian filings. What you're looking for is the share beyond six months and whether it's growing. A company whose total receivables grew 20% while the over-six-month bucket grew 60% hasn't gained larger customers. It has stopped collecting from somebody. The schedule also separates amounts due from related parties, which belong to governance analysis.
Inventory composition splits into raw materials, work in progress and finished goods. Raw materials building up is a purchasing decision. Work in progress building up points at a production bottleneck. Finished goods building up means the company made things nobody has bought, and it leads a demand disappointment by a quarter or two.
Payables to micro and small enterprises are disclosed separately, along with any interest due on payments made beyond the statutory period. If that balance is rising, the company is paying its smallest suppliers late, and better terms have nothing to do with it.
Reading a lengthening cycle
Each component lengthens for different reasons, and each reason has a different severity.
Receivable days rising while revenue accelerates is the most reliable early warning in accounts. If you only watch one number, watch this one. It can mean a real shift toward larger customers with more bargaining power, a push of stock into distributors at the end of a quarter, or customers who can't pay. The ageing schedule distinguishes them.
Inventory days rising is the earliest visible sign of a demand problem, because production plans are set months before sales disappoint. It's also the setup for a write-down, since stock that hasn't moved will eventually be marked below cost.
Payable days rising is the ambiguous one. It can mean the company gained scale and negotiated better terms, which is an improvement. It can equally mean the company is short of cash and paying late, which is the beginning of a supply problem. The two look identical in the ratio and different in the micro and small enterprise disclosure.
The signal worth more than all of them
A falling working capital requirement while sales grow.
That combination usually means the business gained bargaining power somewhere: with customers, with suppliers, or over its own inventory through better forecasting. It's one of the best signals in fundamental analysis. Companies almost never announce it. It happens gradually and doesn't fit into an investor presentation.
Compute working capital as a percentage of revenue for five years. Take a company whose ratio fell from 22% to 15% while revenue doubled. It has released cash equal to a meaningful fraction of a year's profit, without any change in its margin.
What to strip out before analysing
The version of working capital that's useful for analysis excludes cash and short-term borrowings, because neither is operational.
A company with ₹1,775 crore of current assets and ₹1,005 crore of current liabilities has ₹770 crore of working capital on the face of the balance sheet. If ₹260 crore of the assets is cash and ₹300 crore of the liabilities is a working capital loan, the operating figure is ₹810 crore, and it's the operating figure that moves with sales.
This matters when you build a discounted cash flow, where the working capital movement is subtracted from the cash flow. Including a change in the bank balance in that line double-counts cash.
The routine
Work from the filings once a year and skip the screener. Compute the three components and the cycle for five years and for five peers, all identically.
Then read the ageing schedules for the company you care about.
Then compute the funding requirement implied by next year's growth, and check it against the company's own cash generation and its undrawn credit lines, which are disclosed.
Three steps. They take about half an hour and they answer a question no margin analysis can, which is whether this company's growth pays for itself or has to be borrowed.
Why this sits so close to the front of the work
Trading problems appear in working capital before they reach the income statement.
Customers in difficulty stop paying before the sale is reversed. Weak demand shows up as unsold inventory before it shows up as lower revenue. A company under funding pressure stretches its suppliers before it defaults on a bank.
All three are visible in three ratios and two ageing tables, computed from a document anyone can download, several quarters before the profit line moves.
Sector norms, and why the level means nothing on its own
The cycle is set by the business model far more than by management, so comparing across sectors produces nonsense.
A jeweller carries months of inventory because the stock is the shop. A supermarket turns its stock in a fortnight and pays in sixty days, so its cycle is far below zero. A capital-goods maker building custom equipment has receivables measured in months because the customer pays against milestones. An information technology services firm at 70 days of receivables is normal, and a cash-and-carry retailer at 70 days is a fraud investigation.
So the useful comparison is always within a sector, and the useful reading is always the trend. The level on its own means nothing.
It follows that a company which changes its cycle materially without changing its business has changed something else. That could be its terms, its customers or the truth of the receivable.
What to do with the answer
Three uses, in increasing order of value.
First, forecast the funding. Next year's revenue growth multiplied by the cycle gives the working capital the company will need. Set it against the company's own cash generation and its undrawn credit lines, which are disclosed. Then you know whether the growth plan is funded.
Second, value the improvement. A company that reduces its cycle from 71 days to 55 days on ₹4,800 crore of revenue releases roughly ₹210 crore of cash, once, without any change in margin. That's a real return to the owner and it's invisible in the income statement.
Third, test the story. Management describing a shift toward larger, better customers should show up as longer receivables and better margins. Management describing better inventory control should show up as lower inventory days without a fall in gross margin. Where the numbers don't move the way the narrative says they should, the narrative is the thing to doubt.
The version for a business with no inventory
For a services firm or a subscription business, inventory days are zero. The cycle reduces to receivable days minus payable days.
For a subscription business collecting in advance, it goes further: the deferred revenue balance is a liability that funds the business, and the cycle can be strongly negative. A software company collecting a year upfront has the customer's money for eleven months before delivering the service, so the deferred revenue balance is one of the few forward-looking numbers on a balance sheet.
Growing deferred revenue means customers are committing further ahead. When the balance falls, that's a revenue decline that hasn't yet reached the income statement.
Different business, same arithmetic, opposite sign.
Why working capital shows the problem first
Trading difficulties reach the balance sheet before they reach the income statement, and they reach it in a specific order. A customer under pressure stops paying long before anyone reverses the sale, so receivable days rise while revenue looks fine. Weak demand appears as unsold finished goods months before it appears as lower sales, because production plans were set against a forecast. Short of cash, a company stretches its suppliers before it misses a bank payment, and the disclosure of amounts owed to micro and small enterprises makes that visible. All three of those are computable from three ratios and two ageing tables in a document anyone can download, and all three typically appear several quarters ahead of the profit line moving. Working capital analysis belongs near the front of the work for that reason. Most templates put it in the appendix.
Receivables tell you about the customer.
Inventory tells you about demand.
Payables tell you about the company itself.
One number, computed three ways, and why they differ
The same company can be quoted at three different cycle lengths depending on how the ratios were built, so compute the figure yourself from the filings.
Using revenue in the inventory and payable denominators instead of cost of goods sold inflates both, because revenue exceeds cost by the gross margin. At a 35% gross margin that error shortens reported inventory days by about a third.
Year-end balances distort any year with an acquisition, a large seasonal build, or a March push into the channel.
And standalone figures, for a group whose subsidiaries hold the inventory, produce a cycle for a legal entity. The business is only visible in the consolidated accounts.
Build it once, from consolidated statements, with cost in the denominator and average balances, and apply the same recipe to every peer.
Consistency beats precision here.