Getting A Handle On The Trade Receivables Management Of Fraser & Neave Holdings Bhd, A Key Subsidiary Of Fraser and Neave Limited

Fraser & Neave Holdings Bhd (KLSE: 3689.KL) is listed in Malaysia and it is an important subsidiary of the Singapore-listed Fraser and Neave Limited (SGX: F99). In the 12 months ended 30 September 2016, Fraser & Neave Holdings accounted for around three-quarters of Fraser and Neave’s profit after tax.

The Malaysia-listed company is a major player in the food & beverage products market in Malaysia and it focuses on selling beverages (such as isotonic drinks, fruit teas, soft drinks, and more) and dairy products.

As a food & beverage products manufacturer, Fraser & Neave sells its products to customers (retailers) on a credit basis.  This makes the management of trade receivables important to keep an eye on. As of 30 September 2016, Fraser & Neave has total receivables of RM 549 million.

To assess Fraser & Neave’s handling of its trade receivables, I will look at two things: (1) Changes in the value of the company’s trade receivables as compared to 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 Fraser & Neave’s trade receivables and revenue changed from its FY2012 (fiscal year ended 30 September 2012) to FY2016:

Fraser & Neave trade receivables and revenue chart
Source: Fraser & Neave annual reports

For the timeframe we’re looking at, Fraser & Neave’s trade receivables and revenue have grown by 5% and 29%, respectively. Moreover, the company has managed to keep its trade receivables at a low level (trade receivables in FY2016 was less than 15% of revenue).

Trade receivable days

Simply put, the trade receivables days figure indicates the average number of days that a company needs to collect cash from the credit-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 Fraser & Neave’s trade receivables days from FY2012 to FY2016:

Fraser & Neave trade receivables days chart
Source: Fraser & Neave annual reports

We can see that the company’s trade receivables days has improved from 58 in FY2012 to 48 in FY2016.

A Foolish conclusion

In sum, we can observe that Fraser & Neave’s trade receivables management has been decent and has improved over the timeframe under study, given that its trade receivables has grown slower than revenue and its trade receivables days has declined.

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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.