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How Investors Can Understand 1 Crucial Aspect of QAF Limited’s Business: Trade Receivables Management

QAF Limited (SGX: Q01) is a food production company. Its business activities include bakery operations, pork production, food processing and distribution, and more.  Some of the more prominent consumer food brands the company has in its portfolio are Gardenia, Cowhead, and Farmland.

The company may be interesting to some investors because of its long-term stock market performance; over the past five years, its stock price is up by 127%.

As a food producer, QAF processes raw ingredients into food products, which are generally sold to customers on a credit basis. As such, the company’s operations require a significant amount of working capital.

Working capital is defined as current assets minus current liabilities. As of 30 September 2016, QAF has working capital of S$142.5 million.

Given QAF’s working capital requirements, it is important that the company handles this aspect of its business well.

Trade receivables management represents one facet of working capital. In here, I want to assess how well QAF has been managing its trade receivables over its last five fiscal years. To do so, I will study two things: (1) Changes in the company’s trade receivables value compared to changes in revenue; and (2) day sales outstanding.

Changes in trade receivables value

Trade receivables represents revenue that has been recorded by a company but that is yet to be collected.

Ideally, changes in the value of a company’s trade receivables should not outpace that of revenue growth. The value of a company’s trade receivables should also be low in relation to its revenue. The idea here is simple: The lower the trade receivables a company has in relation to its revenue, the lower the capital required to fund the trade receivables.

So how has QAF’s trade receivables and revenue changed in its last five fiscal years? Let’s check out the chart below.

QAF revenue and trade receivables
Source: QAF’s annual reports

It turns out that QAF’s revenue and trade receivables have grown by a total of 2% and 14%, respectively, from 2011 to 2015. In other words, the food producer’s trade receivables growth rate over the past five years is seven times that of its revenue.

But, QAF’s receivables is low in relation to revenue – as you can see from the graph, the company’s revenue in 2015 is around S$1 billion while its trade receivables is only around S$96 million.

Day sales outstanding

Simply put, the day sales outstanding figure indicates the average number of days that a company needs to collect cash from the sales it has made to its customers. Ideally, what we want to see is a stable or declining day sales outstanding over the years.

The metric is calculated with the following formula:

(Trade Receivables) / (Revenue) x 365 days

The chart below plots QAF’s day sales outstanding from 2011 to 2015:

QAF day sales outstanding
Source: QAF’s annual reports

We can see that QAF’s day sales outstanding has increased by three days, moving up from 32 days in 2011 to 35 days in 2015.

A Foolish conclusion

In sum, we can observe that QAF’s trade receivables management has weakened over the period under study, given that its trade receivables has grown faster than revenue and its day sales outstanding has moved higher.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.