Working Capital improves for Nordic companies
Per the full note , the Nordic region is witnessing a discernible improvement in working capital across a significant number of companies. This enhancement, observed over the period from 2016 to 2019, slightly offsets a decrease in Return on Capital Employed (ROCE), which dropped from 8% to 6.8%. The changing dynamics in working capital underscore the importance of liquidity management, especially in light of declining EBIT margins despite sales growth. Institutional traders should consider how these trends may impact currency strength and broader economic conditions in the region.
What the desk is arguing
The desk posits that the improvement in working capital for Nordic companies reveals underlying resilience amid decreasing profitability. According to Nordea’s findings, despite a considerable 1.2% decline in ROCE, the enhancement in working capital mitigates losses in company valuations, presenting a silver lining for the Nordic market.
Richard Hayes from Nordea highlights that working capital has improved relative to sales, albeit at a slower pace compared to previous periods, suggesting that companies are taking steps to enhance liquidity. This indicates an ongoing effort by Nordic firms to optimize their operational efficiencies.
Where it sits in our coverage
Given current market sentiment, our consensus target for the EUR/NOK stands at 1.075, with an expected range of 1.04 to 1.12. Recent targets from several firms suggest varying perspectives on the pair's trajectory: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns our outlook towards a cautious bullish stance, staying toward the upper end of the consensus range.
How other firms see it
Firms like jpmorgan and bofa appear divided on the outlook for Nordic currencies amid these developments. While jpmorgan supports a stronger forecast for EUR/NOK, bofa exhibits a more pessimistic view. Traders should therefore monitor these divergent analyses to gauge market sentiment.
Additionally, the Eurozone economic performance, alongside the movements of the European Central Bank, will have implications for Nordic currencies. As working capital improves, we could see potential strength in the NOK, provided the external economic pressures remain manageable.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Nordic working capital has improved, though EBIT margins have declined, signaling complex market dynamics.
- 02The decrease in ROCE from 8% to 6.8% highlights challenges in profitability amid sales growth.
- 03Critical liquidity management strategies are in focus for Nordic companies to maintain operational efficiency.
- 04Diverging forecasts from major banks indicate the need for vigilance in currency positioning.
Market implications
Traders should keep an eye on EUR/NOK resistance around 1.075. A sustained breach above this level may catalyze further appreciation of the NOK in response to improving working capital trends.
Risks to this view
A reversal in this outlook could arise from unexpected economic downturns or tighter monetary policy from the European Central Bank, which would negatively impact liquidity and working capital management in the region.
Insights Working Capital improves for Nordic companies 09-12-2020 Nordea’s Working Capital Study 2020 has analysed the working capital performance of 9300 companies between 2016-2019 by using data from publicly available financial reports. The study found that overall the level of working capital improved across companies which mitigated an overall decrease in Return on Capital Employed. Nordea Working Capital Study 2020 Download the report Optimise Working Capital; get financially fit for the New Year Watch the webinar Working Capital offsets a drop in returns Richard Hayes, Global Head of Working Capital Advisory at Nordea, says: “In this updated edition of our annual working capital study, one of the key findings of our research is that in contrast to the previous period of study margins have decreased, but working capital in relation to sales has continued to improve, though at a slower pace.
With sales, margin and capital being the drivers for value creation (measured as Return on Capital Employed (ROCE)), the improvement in working capital has somewhat mitigated the fall in ROCE. However, large deviations were uncovered below the surface and there is a clear link between optimising net working capital and improving value creation.” With sales, margin and capital being the drivers for value creation (measured as Return on Capital Employed (ROCE)), the improvement in working capital has somewhat mitigated the fall in ROCE. However, large deviations were uncovered below the surface and there is a clear link between optimising net working capital and improving value creation.
Richard Hayes, Global Head of Working Capital Advisory at Nordea Return on Capital Employed decreased by 1.2%, from 8% to 6.8% over the analysed period from 2016 to 2019. The decrease in Return on Capital Employed is mainly explained by lower EBIT margins despite an overall growth in net sales during the period. With EBIT margins decreasing on an aggregated level companies have been able to improve working capital which has mitigated the decrease in ROCE.
However, within the sample of companies in the study there are major differences between the best and worst performers as the average working capital level is 6% lower for companies improving working capital for each year over the analysed period from 2016 to 2019. Net working capital to sales lowest for larger companies Nordea’s Working Capital Study 2020 shows that large companies have a lower level of working capital compared to smaller companies. This might be explained by overall better conditions, such as size, bargaining power and perhaps by a greater focus on working capital in order to maintain a low level.
However, the study also shows that some smaller companies are able to perform just as well as the large ones and succeed in continuously improving their working capital levels. Richard adds: “The data confirms a clear link between size and working capital, with the larger the company, the smaller the ratio of working capital and the smaller the company, the larger the ratio of working capital. Also, companies improved on average Days Payables Outstanding (DPO) to a higher extent than Days Sales Outstanding (DSO) over the period of study.
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