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How Investors Can Understand 1 Crucial Aspect of Sheng Siong Group Ltd’s Business: Trade Payables Management

Sheng Siong Group Ltd (SGX: OV8), which listed on August 2011, is one of the largest supermarket chains in Singapore. The company’s network of 42 supermarkets in the Garden City are located primarily in the heartlands.

Sheng Siong could be of interest to some investors given its solid long-term stock market performance. Since the close of its trading debut, Sheng Siong’s shares are up by 178%.

As a retailer, Sheng Siong purchases goods in bulk for resale in its stores across Singapore. This makes the management of trade payables very important for the company.

In here, I want to assess Sheng Siong’s management of its trade payables, by 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 Sheng Siong’s balance sheet. Ideally, trade payables should (1) change in tandem with revenues and (2) be high in relation to revenues.

Here’s a chart showing how Sheng Siong’s trade payables and revenues have changed from 2011 to 2015:

Sheng Siong revenue and trade payables
Source: Sheng Siong’s annual reports

For the period under study, Sheng Siong’s revenues have grown by a total of 32% whilst its trade payables have managed to keep up by growing at 30%. Moreover, the amount of trade payable in 2015 is around 15% of revenue – that’s a respectable number.

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 Sheng Siong’s trade payable days changed from 2011 to 2015? Let’s see below:

Sheng Siong Trade Payable Days
Source: Sheng Siong’s annual reports

We can see that after an initial drop from 68 to 59 in 2012, Sheng Siong’s trade payable days have slowly climbed higher to end 2015 at 69.

A Foolish conclusion

In sum, we can see that Sheng Siong has displayed decent trade payable management given its (1) similar increases in trade payables and revenues over time, (2) a high ratio of trade payable to revenue, and (3) a slightly higher trade payable days in 2015 compared to 2011.

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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.