The working capital of the S&P 1500 companies rose to their highest levels in a decade in 2020 as the Covid-19 crisis impacted supply chains and stalled consumer demand worldwide, leaving the firms with excess inventory levels. This was among the key findings in J.P. Morgan’s 2021 edition of the Working Capital Index report, published this month.
The annual report, which analyses the working capital metrics of companies listed on the S&P Composite 1500 index, also found cash levels in 2020 rising to a seven-year high as firms turned to fund-raising initiatives and cash preservation measures to shore up their liquidity buffers during the pandemic. Meanwhile, an estimated $507 billion of liquidity remained trapped within the supply chains of the S&P 1500 companies as at the end of last year, up from $497 billion in 2019.
“Covid-19 has further exposed the vulnerabilities of global supply chains, which were already under pressure in recent years as a result of the geopolitical trade tensions. A key focus for finance practitioners will be to continue building supply chain resiliency in their operations, in order to withstand future shocks as well as to mitigate the negative impact on working capital,” said Gourang Shah, global head of Treasury and Working Capital Optimisation for Wholesale Payments at J.P. Morgan, who is an author of the report.
The report found nearly two-thirds (64 percent) of the S&P 1500 companies experiencing deterioration in their working capital efficiencies in 2020, with the aerospace and defense, and the airlines sectors among the hardest hit as the demand for travel collapsed amid widespread lockdowns and movement restrictions. The semiconductor industry meanwhile showed the most improvement in working capital efficiencies on the back of strong sales of consumer electronics goods and increased demand for cloud services as the global working population pivoted to remote work arrangements.
Through examining the recovery trends of the S&P 1500 companies in previous economic downturns of similar magnitude, the report also found companies during the recovery phase of the 2008 global financial crisis (GFC) that registered strong revenue growth due to the ability to invest early, demonstrated robust working capital efficiencies.
“We observed strong correlation between companies that were able to manage working capital effectively during the GFC recovery phase in order access internal funding and the pace of rebound in their revenue growth. This reiterates the importance for corporates to actively deploy working capital tools as a means to recover quickly from the Covid-19 crisis,” Shah said.
According to the report, the top four industries expected to show the most growth as they rebound from the pandemic include the semiconductor, e-commerce, pharmaceutical and technology hardware sectors.
The Working Capital Index was launched in 2019 to provide insights into the working capital performance of some the world’s largest and most influential companies and to serve as an industry standard for companies to benchmark their working capital performances against peers.