After reaching 10-year highs in 2020, the working capital of the S&P 1500 companies returned to pre-COVID-19 levels in 2021.
Today, J.P Morgan’s 2022 edition of the Working Capital Index report finds that the global economy’s recovery has led to a 20 percent increase in sales across S&P 1500 companies, resulting in an inventory reduction.
The Working Capital Index was launched in 2019 to provide insights into the working capital performance of some of the world’s largest and most influential companies.
The annual report, which analyses the working capital metrics of companies listed on the S&P Composite 1500 Index, also shows cash levels amongst corporates reducing in 2021 compared to 2020.
This is a result of companies deploying funds strategically after a period of cash preservation; companies typically conserve cash in times of crises or uncertainty to ensure ample liquidity.
Meanwhile, the report estimates that $523 billion of liquidity was trapped within the supply chains of S&P 1500 companies at the end of last year, up from $507 billion in 2020.
Gourang Shah, global advisory head for payments at J.P. Morgan, said, “We are seeing working capital of corporates returning to pre-pandemic levels.
“However, 2022 has brought on new challenges including the Ukraine-Russia conflict and rising interest rates, which are further disrupting global supply chains and increasing the costs of financing.
“A key focus for finance practitioners will be to enhance their working capital management to ensure their businesses endure near-term uncertainties.”
The report indicates that nearly 70 percent of the S&P 1500 companies experienced an improvement in their working capital efficiencies in 2021.
Pharmaceuticals, apparel and accessories, and automotive sectors are among the industries improving the most.
Conversely, the aerospace and defence, technology software and media sectors are the least optimal.
With the focus on environmental, social and governance (ESG) principles increasingly guiding funding decisions of lenders, the report also explores how ESG risk ratings are impacting access to external financing across industries.
Industries with lower ESG scores, including oil and gas, airlines, pharmaceuticals and utilities, are expected to prioritise ESG in their strategy.
These sectors are also predicted to explore tapping internal sources of funding through optimising working capital and liquidity management.
Gourang Shah, added, “ESG has become a key area of focus for corporates from a funding perspective, as the extent to which they are perceived to be socially responsible is increasingly impacting their ability to access external sources of funding.
“We are seeing companies re-evaluating their business models, operations and supply chains to improve their ESG scores.
“Oil and gas firms diversifying into renewable energy, automakers shifting to electric vehicles production, and metals and mining companies pivoting towards recycling are some clear examples.”