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Understanding One Important Aspect Of BreadTalk Group Limited’s Business – Trade Payables

BreadTalk Group Limited (SGX: 5DA) is a food company that has three main business segments: Bakery, Restaurant, and Food Atrium.

As a bakery and restaurant operator, BreadTalk purchases raw material in bulk, processes the raw material into finished products, and sell those products in its stores.  This requires investment in working capital, mainly inventory and trade receivables.

To fund this working capital requirement, BreadTalk usually uses two funding strategies – trade payables and external borrowings. The former is “free”, while the latter requires a funding cost.

Thus, to reduce external borrowings to fund working capital, it is important that BreadTalk manages its trade payables well. Here, we will try to ascertain how well BreadTalk is managing its payables by looking at two simple trends – trade payable and trade payable days. 

Trade payable

As a business, BreadTalk will likely want to have high trade payables in relation to sales.

The idea here is simple. The higher the trade payable, the lower the external borrowings required to fund the working capital.

So how did BreadTalk’s trade payable change in the last 5 years? Let’s see below.

Source: BreadTalk 2012-2016 Annual Reports

To put the above into perspective, revenue grew by 37%, while payables declined by 17% during the period.

Trade payable days

In simple terms, trade payable days indicate the average number of days that a business has to pay for its credit purchases.

Here, we will use closing trade payables/ cost of sales x 365 days to calculate payable days. Ideally, we would like to see a stable or increasing trade payable days over the years.

So how BreadTalk’s trade payable days change in the last five years? Let’s see below.

Source: BreadTalk 2012-2016 Annual Reports

Here, we see that trade payable days declined from 45 days to 28 days during the period.

Conclusion:

In summary, we see that BreadTalk’s trade payable management has weakened during the period, as indicated by a decline in trade payable levels and trade payable days during the period.

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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.