Getting To Grips With The Trade Payables Management Of A Crucial Subsidiary Of Fraser and Neave Limited

Fraser & Neave Holdings Bhd (KLSE: 3689.KL) is listed on Bursa Malaysia, the stock exchange of 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, the former accounted for around three-quarters of the latter’s profit after tax.

The Malaysian company is a major player in Malaysia’s beverages and dairy products market.

As a beverages and dairy products manufacturer, Fraser & Neave’s operations require working capital, which is calculated as current assets minus current liabilities. As of 31 March 2017, Fraser & Neave has working capital of RM 1.01 billion.

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 definitely involves interest.

Thus, to reduce external borrowings to fund working capital, it is important that Fraser & Neave handles its trade payables well. Here, we will try to ascertain how well Fraser & Neave 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 Fraser & Neave’s balance sheet. Ideally, trade payables should (1) change in tandem with revenues and (2) be high in relation to revenues. The higher the trade payables, the lower the external borrowings needed to fund the company’s working capital needs.

Here’s a chart showing how Fraser & Neave’s trade payables and revenues have changed from its FY2012 (fiscal year ended 30 September 2012) to FY2016:

Source: Fraser & Neave’s annual reports

What we can see is that the company’s trade payables growth has tracked its revenue growth closely. However, Fraser & Neave’s trade payables was only 17% of its revenue in FY2016 – that’s low.

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 Fraser & Neave’s trade payables days changed from FY2012 to FY2016? Let’s see below:

Source: Fraser & Neave’s annual reports

We can see that Fraser & Neave’s trade payables days had increased from 88 to 98 over the timeframe under study.

A Foolish conclusion

In sum, Fraser & Neave has displayed decent management of its trade payables. Although its trade payables is low in relation to revenue, its trade payables growth has tracked its revenue growth. Moreover, its trade payables days has increased over the past five years.

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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.