Getting To Grips With The Trade Payables Management Of Top Glove

The Malaysia-based Top Glove (SGX: BVA)(KLSE: 7113.KL) is the largest rubber gloves maker in the world with a market share of around 25%. It is dual-listed in both Singapore (since June 2016) and Malaysia (since March 2001).

As a manufacturer, Top Glove’s operations require working capital. 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 Top Glove handles its trade payables well. Here, we will try to ascertain how well Top Glove 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 Top Glove’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 Top Glove’s trade payables and revenues have changed from FY2012 (fiscal year ended 31 August 2012) to FY2016:

Top Glove revenue and trade payables days
Source: Top Glove’s financial statements

For the period under study, Top Glove’s revenue has increased by a total of 25%, but its trade payables has climbed by 43%. The company’s trade payables at the end of FY016 is also just 11% of its revenue.

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 Top Glove’s trade payables days changed from FY2012 to FY2016? Let’s see below:

Top Glove trade payables days
Source: Top Glove’s financial statements

We can see that Top Glove’s trade payables days has increased from 44 in FY2012 to a high of 61 in FY2015, before moderating to 53 in FY2016.

A Foolish conclusion

In sum, Top Glove’s trade payables management has strengthened. That’s because of two factors: (1) The company’s trade payables has grown faster than revenue, indicating that it is gaining bargaining power over its suppliers; and (2) there’s an increase in the trade payables days. These being said, Top Glove’s trade payables days is actually rather low in relation to 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.