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

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.

In general, for a company to fund its working capital needs, there are two ways to do so. One is to make use of trade payables (which is essentially money owed to suppliers in the normal course of business) and the other is to make use of external borrowings. The former is usually ‘free’ in the sense that no interest has to be paid, while the latter will definitely involve interest.

Thus, to reduce external borrowings to fund working capital, it is important that Riverstone handles its trade payables well. Here, we will try to ascertain how well Riverstone has been managing its trade payables by looking at two things: (1) Changes in the value of its trade payables as compared to revenue, and (2) days payable outstanding, which is also known as trade payables days.

Changes in trade payables

Trade payables is an account found on the liabilities section of Riverstone’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 Riverstone’s trade payables and revenues have changed from 2012 to 2016:

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

For the period under study, Riverstone’s revenue has grown by a total of 111% whereas its trade payables has increased at a slower rate of 88%.

Trade payables days

In simple terms, trade payables 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 payables days be stable or increase over the years.

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

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

So how has Riverstone’s trade payables days changed from 2012 to 2016? Let’s see below:

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

We can observe that Riverstone’s trade payables days have fluctuated between a low of 55 to a high of 80. In 2016, the company’s trade payables days was 69, 4 days lower than in 2012 and 11 days lower than in 2015.

A Foolish conclusion

In sum, Riverstone’s management of its trade payables appears to have weakened in recent given (1) the faster growth in trade payables as compared to revenue, and (2) the lower trade payables 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. The Motley Fool Singapore has recommended shares of Riverstone Holdings. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.