EBITA/WC

Return on capital employed is the textbook ratio. EBITA/WC is what operators actually use.

The formula

EBITA/WC = Earnings before interest, tax, and amortisation ÷ Working capital

Working capital here typically means trade receivables plus inventory minus trade payables — the capital tied up in day-to-day operations. Some variants use average working capital; others use period-end.

The result is a multiple: how many times your operating earnings exceed the working capital required to generate them.

What it measures

EBITA/WC captures capital efficiency at the operating level. It asks: how much earnings does this business produce relative to the capital it ties up in operations?

A business generating £5m EBITA on £2m working capital has an EBITA/WC of 2.5x. That same £5m EBITA on £10m working capital is only 0.5x. The earnings are identical; the capital intensity is completely different.

Serial acquirers like Addtech and Brown & Brown use this as their primary metric because it focuses managers on capital efficiency, not just profit growth. Growing EBITA by 20% while working capital grows 40% is value destruction, not creation.

Why not ROCE?

Return on capital employed (ROCE) is the textbook ratio. It includes all capital — fixed assets, goodwill, everything. So why do operators prefer EBITA/WC?

Working capital is controllable. A general manager can influence receivables collection, inventory turns, and payment terms. They can’t do much about the goodwill their parent company paid to acquire them, or the building they operate from.

It avoids acquisition accounting noise. ROCE gets distorted by purchase price allocation — the same operating business shows different ROCE depending on what the acquirer paid. EBITA/WC measures the underlying operations regardless of deal structure.

It’s comparable across units. A decentralised organisation can compare EBITA/WC across fifty business units without adjusting for different acquisition histories or capital structures.

The metric answers the question an operator actually controls: given the working capital tied up in this business, how efficiently are we converting it to earnings?

What it hides

EBITA/WC ignores fixed capital. A business might show excellent EBITA/WC while requiring massive investment in plant, equipment, or technology. The working capital efficiency looks great; the total capital requirement tells a different story.

It also ignores capital structure. Two businesses with identical EBITA/WC can have completely different debt levels. One might be conservatively financed; the other leveraged to the hilt. The ratio doesn’t distinguish.

Negative working capital creates odd results. Some businesses — retailers collecting cash before paying suppliers, or subscription companies collecting annual fees upfront — have negative working capital. EBITA divided by a negative number produces a meaningless negative ratio. For these businesses, the metric simply doesn’t apply.

Where it breaks down

Seasonality distortion. Working capital fluctuates through the year. A retailer’s inventory peaks before Christmas; a B2B business might have receivables spike at quarter-end. Period-end snapshots can mislead. Average working capital helps but doesn’t fully solve seasonal businesses.

Quality of earnings. EBITA includes non-cash items like provisions and accruals. A business can inflate EBITA through aggressive accounting — releasing provisions, capitalising costs — without generating real cash. EBITA/WC looks better than underlying reality.

Growth phase mismatch. A growing business necessarily ties up more working capital: more inventory to support higher sales, more receivables as revenue increases. EBITA/WC might decline during healthy growth simply because working capital leads earnings. The ratio penalises growth in the short term.

Industry baselines vary wildly. A 2x EBITA/WC might be excellent in distribution and mediocre in software. Cross-industry comparisons are meaningless without context.

The decision it enables

EBITA/WC tells you whether a business is capital-light or capital-heavy at the operating level.

High EBITA/WC (above 2x in most industries) means the business throws off cash relative to its operating capital needs. Growth is largely self-funding. These businesses can compound without constant reinvestment.

Low EBITA/WC (below 1x) means capital gets tied up. Growth consumes cash. The business needs external funding or retained earnings to expand.

For acquirers, the metric identifies which businesses generate returns from operations versus which require capital to function. For operators, it focuses attention on the levers they actually control: collections, inventory, and payables.

The serial acquirers who use this metric obsessively aren’t doing it for sophistication. They’re doing it because it works.

The metric series: Part of a series on metrics that reveal what headline numbers hide.