Getting A Handle On The Trade Receivables 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 gloves manufacturer, Top Glove processes raw materials into finished products, which are then sold to customers on credit terms. This makes the company’s management of trade receivables important to keep an eye on. As of 31 August 2016, Top Glove has trade receivables of RM 345.9 million.
To assess Top Glove’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 Top Glove’s trade receivables and revenue changed from its FY2012 (fiscal year ended 31 August 2012) to FY2016:
Source: Top Glove’s financial statements
So, what happened from FY2012 to FY2016 was that Top Glove’s revenue and trade receivables grew by a total of 25% and 18%, respectively. In other words, the company’s trade receivables has grown at a slower pace than revenue. Moreover, Top Glove has managed to keep its trade receivables low in relation to revenue (in FY2016, its trade receivables was only around 12% of 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 Top Glove’s trade receivables days from FY2012 to FY2016:
Source: Top Glove’s financial statements
Although the trade receivables days spiked in FY2015, the overall picture is that Top Glove’s trade receivables days had declined slightly (by 2 days) from FY2012 to FY2016.
A Foolish conclusion
In sum, Top Glove’s management of its trade receivables has remained stable for the timeframe under study given that (1) its trade receivables has grown slower than revenue, (2) its trade receivables is low in relation to revenue, and (3) its trade receivables days has decreased.
