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How Investors Can Understand 1 Crucial Aspect Of Sheng Siong Group Ltd’s Business: Trade Receivables 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, the company would ring up sales when its customers make payment for the products they’ve purchased at the checkout counters of its supermarkets. But, Sheng Siong would typically take some time to collect the actual cash from the sales it has made.

What’s interesting with the number of days needed for Sheng Siong to collect the cash is that it is typically shorter than the number of days the company takes to pay its suppliers. This is a positive trait to have in business and it helps Sheng Siong produce strong cash flows.

In here, I want to assess changes – if any – in Sheng Siong’s management of its trade receivables over the last few years. To do so, I will be looking at two things: (1) Changes in the company’s trade receivables value compared to changes in revenue; and (2) changes in its trade receivable days, which is also known as 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.

So how has Sheng Siong’s trade receivables and revenue changed in its last five fiscal years from 2011 to 2015? Let’s check out the chart below.

Sheng Siong revenue and trade receivable
Source: Sheng Siong annual report

It turns out that Sheng Siong’s revenue and trade receivables have grown by a total of 32% and 69%, respectively, during the period under study. In other words, the company’s trade receivables growth has significantly outpaced revenue growth.

But, the company’s trade receivable at end-2015 is less than 2% of its revenue in 2015.

Trade receivable days

Simply put, the trade receivable days 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 trade receivable days over the years.

The metric is calculated with the following formula:

(Trade Receivable) / (Revenue) x 365 days

The chart below plots Sheng Siong’s trade receivable days from 2011 to 2015:

Sheng Siong trade receivable days
Source: Sheng Siong annual report

We can see that Sheng Siong’s trade receivable days has deteriorated – it has increased from 4 days in 2011 to 6 days in 2015.

A Foolish conclusion

In sum, we see that Sheng Siong’s management of its trade receivables has weakened over the period under study, given that its trade receivable has grown faster than revenue and its trade receivable days has moved higher. These being said, Sheng Siong’s trade receivable in 2015 was merely a tiny fraction of its revenue.

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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.