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Top E.U. Firms Are Holding More Than $1 Trillion In Net Working Capital

Financial analysts are fairly optimistic about Europe, but the latest Europe Working Capital Survey released by REL Consultancy, part of the Hackett Group, found the EU’s top 1,000 nonfinancial companies saw their cash conversion cycles slip as they hold onto more net working capital.

The data, released Thursday (Aug. 3), found more than $1.2 trillion in net working capital among the REL 1000, while their cash conversion cycle dropped 3.6 percent in 2016, according to the report.

That means these businesses lost the use of that capital, explained REL Consultancy Senior Manager Bastian Krawinkel in an article for FinancialDirector. He explained that the cash conversion slip is a result of increased inventory levels and receivables.

Days inventory outstanding increased by 9.1 percent, the report found, while days sales outstanding increased by 5.9 percent. Days payable outstanding, meanwhile, spiked by more than 10 percent, a strong performance that Krawinkel said “somewhat offset[s] the disappointments of the other results.”

“Why the discrepancy between the largely good macroeconomic news and disappointing working capital figures?” he asked. “Optimism may be one culprit. Inventories build up when sales slow, but they also build sometimes in expectation of a coming uptick in sales.”

In the U.S., separate data by the Assn. for Financial Professionals found that top corporates are similarly hoarding their cash, with cash reserves accelerating at a faster-than-expected pace for Q2. According to researchers, gridlock in Washington and subsequent uncertainty over regulations means businesses are holding off on investment, which may have negative consequences for the overall U.S. economy.

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