Friday 22 September 2017
 
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ANALYSIS

Weakening working capital metrics leading to additional
strain on liquidity, says the study

Low oil hitting working capital in Middle East

DUBAI, August 15, 2017

Overall working capital performance in the Middle East has decreased by nine days in 2016 bringing the total decline to 14 days since 2014 with lower oil prices being cited as one of the main reasons for the decline, a report said.

The squeeze in working capital was initially felt by small sized companies in 2015, continuing through to 2016, added the report titled “2017 Middle East Working Capital Study” from PwC, a leading provider of assurance, advisory and tax services.

The study also reveals that the liquidity pressure has since spread to mid-market and large companies which also experienced rapid deterioration of their working capital throughout 2016. It shows that very large companies have continued to outperform their smaller peers in 2016 by exercising their size dominance and adhering to better working capital management practices.

Mihir Bhatt, director, PwC Middle East and the report’s lead author said: "The study mirrors the situation that we see on the ground when working with our clients. Leading companies are tackling their working capital challenges head on, and are able to outperform their peers regardless of sector.”

“When we look at the regional performance in more detail, our study shows that while Saudi Arabia working capital deteriorated for six consecutive quarters since Q3 2015, Kuwait has relatively the weakest net working capital (NWC) performance across key economies with circa 30 per cent deterioration from 2014 to 2016,” he added.

While the UAE and Saudi Arabia are the largest economies in the region, they also have the largest (on average) invested working capital days in the survey. This likely reflects the industry mix of companies surveyed but also suggests potential opportunities for significant working capital release.

In addition to the cash benefits received from better working capital management, leading working capital performers have shown better KPIs across all key financial metrics such as revenue growth, EBITDA margin and return on capital employed, demonstrating the impact of working capital efficiency extends well beyond cash.

Working capital and cash management is an increasing focus for boards, management teams and shareholders.

“However, the general level of awareness is still relatively low in the Middle East, which is reflected in our study results. Macroeconomic factors are putting increasing levels of stress and uncertainty on Middle East businesses - working capital and cash management are central to this but they also play to the growth agenda,” said Bhatt.

"We are having numerous discussions with our clients about how they could improve their liquidity through better management of working capital. Releasing cash from working capital is one of the cheapest forms of financing and our clients are starting to see the value it can bring to shareholders. Now the topic is more often about how it can be done, not why it should be done,” Bhatt concluded. – TradeArabia News Service




Tags: oil price | PWC | KPI |

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