The cash conversion cycle looks at the amount of time a company takes to sell its inventory, collect its receivables and the time it takes to pay suppliers. The metric indicates how efficiently a company is managing its working capital and generating cash flows. Apple’s cash conversion cycle stood at -53 days for FY’15, per our estimates, implying that it practically ran its supply chain with credit extended by its vendors. In contrast, Samsung has a long CCC of close to 78 days. Below, we look at the cash conversion cycles for the two companies and the reasons for the differences.
- Apple has a sizable retail operation, which means that it gets paid in cash or via credit card for a large percentage of its sales. This effectively reduces its days of sales outstanding. Samsung on the other hand relies largely on distributors for its consumer electronics operations, while its components business sells to other consumer electronics vendors, who likely require a credit period.
- Apple’s inventory turnover is much quicker, likely driven by its efficient demand planning, its use of contract manufacturers and its streamlined product portfolio. Samsung on the other hand has a sizable manufacturing operation and offers a wide array of products and components, requiring larger sums of cash to be tied up in inventory.
- Apple appears to be able to negotiate better credit terms with its vendors, since it sources in huge volumes and its products use largely similar components. Moreover, Apple’s product life cycles are relatively long, making its business more valuable to vendors. Samsung on the other hand deals with a very wide array of products, implying that volumes to individual vendors could be smaller. Additionally, a bulk of the components for its consumer electronics business come from in-house.
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Apple and Samsung
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