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Getting A Handle on The Trade Receivables of Venture Corporation Ltd

Venture Corporation Ltd (SGX: V03) is an electronics manufacturing services provider. It has its fingers in a range of activities, such as printing & imaging; networking & communications; retail store solutions, and more.

As a manufacturer, Venture processes raw materials into finished products, which are then generally sold to customers on credit terms. This makes the management of trade receivables important to keep an eye on for the company. As of 31 December 2016, Venture has trade receivables of S$713 million.

To assess Venture’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 Venture’s trade receivables and revenue changed from 2012 to 2016:

Venture revenue and trade receivables chart
Source: Venture’s financial statements

For the timeframe we’re looking at, Venture’s trade receivables and revenue have grown by 64% and 20%, respectively. In other words, the company’s trade receivables has grown at over three times the pace of its revenue. Moreover, Venture has not managed to keep its trade receivables low in relation to revenue (in 2016, its trade receivables was nearly a quarter of its 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 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 Venture’s trade receivables days from 2012 to 2016:

Venture trade receivables days chart
Source: Venture’s financial statements

We can see that the company’s trade receivables days has increased from 66 days in 2012 to 91 in 2016. That’s not an improvement.

A Foolish conclusion

In sum, we can observe that Venture’s (1) trade receivables has grown much faster than revenue, (2) trade receivables is high in relation to revenue, and (3) trade receivables days has increased. As such, I think it’s fair to say that the company’s trade receivables management has weakened over the timeframe under study.

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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.