People have expressed some concerns to me about trade receivables. My 2 cents is that trade receivables is not a concern if they are able to collect cash in 100 days. Sure, payments are delayed but eventually as long as accounting profits are converting into operating cash flow, we probably do not need to monitor whether all of sales were converted into collections inside of the FY or whether it created short term trade receivables assets. The only 2 metrics which should matter imo are:
- Write offs/impairments against the receivables.
- Conversion of accounting profits (earnings) into operating cash flow.
A ballooning trade receivables position by itself is not necessarily bad imo. It could definitely reflect aggressive terms with clients to gain market share. Absolutely nothing wrong with that imo. The only key monitorable is whether they are eventually collecting the trade receivables or not. And they are, as of right now. If they are unable to, then that would be a red flag for me.
Here is some data to back KEI’s position on both metrics:
| Attribute/Company | KEI | Finolex | Polycab |
|---|---|---|---|
| Sales (in cr, FY20) | 4355 | 2370 | 7726 |
| Receivables | 1365 | 202 | 1590 |
| Receivable write-offs | 17.9 | 15.75 | 156 |
| Writeoffs/Sales | 0.004 | 0.0066 | 0.02 |
| Average Operating cash flow 5years (A) | 191.432 | 227.4 | 470.8 |
| Average Earnings 5Year (B) | 147 | 330 | 405 |
| Earning to Cash Flow Conversion (A/B) | 1.302 | 0.689 | 1.162 |
While KEI’s receivables are high, they are able to actually collect their receivables and also convert accounting earnings into operating cash flows.
Edit (16/11/2020):
Disc: Planning to move out of this investment because I found a better use for my capital. Full Update on PF thread.