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

Credit: Rvierstone Holdings Limited

Riverstone Holdings Limited (SGX: AP4)  is a rubber gloves manufacturer that makes gloves used in two key markets: Cleanrooms and healthcare.

The company may be interesting to some investors because of its long-term stock market performance. Over the past five years, Riverstone’s stock price has climbed by over 300%.

As a gloves manufacturer, Riverstone processes raw materials – such as butadiene – into finished products, which are generally sold to customers on a credit basis. As such, the company’s operations require working capital.

Working capital is defined as current assets minus current liabilities. As of 31 December 2016, the company has working capital of RM 222 million.

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

Trade receivables represents one facet of working capital. In here, I want to assess how well the company has been managing its trade receivables in its last five fiscal years.

To do so, I will look at two things: (1) Changes in the company’s trade receivables value compared to changes in revenue; and (2) day sales outstanding, which is also known as trade receivables days.

Changes in trade receivables value

Trade receivables represents revenue that has been recorded by a company but that has 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.

Here’s a chart showing how Riverstone’s trade receivables and revenue changed from 2012 to 2016:

Riverstone revenue and trade receivable days
Source: Riverstone’s financial statements from 2012 to 2016

For the period under study, Riverstone’s revenue and trade receivables grew by 111% and 141%, respectively. In other words, the growth rate of the company’s trade receivables is 25% higher than revenue.

Trade receivables days

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

The metric is calculated with the following formula:

(Trade Receivables) / (Revenue) x 365 days

The chart below plots Riverstone’s trade receivables days from 2012 to 2016:

Riverstone trade receivable days
Source: Riverstone’s financial statements from 2012 to 2016

We can see that the company’s trade receivables days has deteriorated, climbing from 68 days in 2012 to 78 days in 2016.

A Foolish conclusion

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

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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