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

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 133%.

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.

To fund its working capital requirement, QAF generally taps on two funding sources: trade payable and external debt. The former does not incur any interest cost while the latter does. Thus it is important that QAF manages its trade payables well so as to reduce reliance on external debt.

To assess QAF’s management of its trade payable, I will be looking at two things: (1) Changes in trade payable as compared to revenue, and (2) days payable outstanding, which is also known as trade payable days.

Changes in trade payable

Trade payable is an account found on the liabilities section of QAF’s balance sheet.

Ideally, trade payable should (1) change in tandem with revenue and (2) be high in relation to revenue. Regarding the latter point, the higher a company’s trade payable is, the lower the external debt required to fund working capital.

Here’s a chart showing how QAF’s trade payable and revenue have changed from 2011 to 2015:

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

It turns out that QAF’s revenue has grown by a total of 2% while trade payable has declined by 5.5%. It’s also worth noting that QAF’s revenue is nearly S$1 billion in 2015 while its trade payable is only around S$87 million.

Trade payable days

In simple terms, trade payable days indicates the average number of days that a business takes to pay its suppliers. The ideal scenario is to see a company’s trade payable days be stable or increase over the years.

The formula for calculating the trade payable days is given below:

(Closing trade payable days) / (cost of goods sold) x 365 days

So how has QAF’s trade payable days changed from 2011 to 2015? Let’s see below:

QAF trade payable days
Source: QAF’s annual reports

Turns out, the company’s trade payable days jumped from 59 days in 2011 to 64 days in 2012 before declining for the next three years to 58 days in 2015.

A Foolish conclusion

In sum, we can observe that QAF’s trade payable management has remained fairly stable over the time period under study, given the small discrepancy between changes in revenue and trade payable, and the slight decline in trade payable days.

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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.