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Is Increase of Sales Credit and Stock Push-driven?
Samsung, LG
Is Increase of Sales Credit and Stock Push-driven?
  • By matthew
  • August 21, 2013, 09:25
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Samsung Electronics and LG Electronics saw a 10% increase in their sale credits in the first half of the year, compared to the same period last year. Samsung’s credit went over 27 trillion won (US$24.1 billion) and LG’s broke 8 trillion won (US$7.16 billion) for the first time. As for stock assets, Samsung has 20 trillion won (US$17.9 billion) and LG has 5.5 trillion won (US$4.9 billion). 

An increase of sale credit means “products were sold but payments were not collected,” and an increase in stock assets means “products were made but not sold.”

An increase in both the sale credit and the stock asset is not good for the company’s financial management. However, the time lag between the sale credit and purchase liabilities, as well as the amount of stock prior to sales, is a very natural trend for a growing company. Experts point out that cash flow and business profit development should be the focus. 

Some have suspected the increase in sale credit and stock assets as a “push-driven effect,” but experts advised that the internal situation must be carefully examined. It is natural for sale credit and stock assets to increase if sales increase. The period of the increase is important. Depending on whether or not the increase happens during an economic recession or recovery, the interpretation can be different.

According to the first half year report submitted to the Financial Supervisory Service, sale credit for Samsung Electronics increased 3.2467 trillion won (US$2.9058 billion) to a total of 27.1079 trillion won (US$24.2616 billion). Its stock assets increased 3.8143 trillion won (US$3.4138 billion) to a total of 21.5618 trillion won (US$19.2978 billion). This is the first time the company has broke 20 trillion won (US$18.9 billion).

Over the same period, LG Electronics’ sale credit increased 1.3 trillion won (US$1.2 billion) to a total of 8.621 trillion won (US$7.716 billion). Its stock asset increased 450 billion won (US$402 million) to a total of 5.524 trillion won (US$4.944 billion). Both Samsung and LG saw these increases as their sales increased. A LG Electronics representative explained, “When sales increase, sale credit and stock assets naturally increase too.” In other words, it’s not a “push-driven effect” as some suspect. 

The receivables turnover (sales/average sale credit) showing the stability of sale credit also supports this explanation. For the past 3-4 years, Samsung’s turnover was 7.5-8.4 times, and LG about 7.4-7.8 times. This can be interpreted as Samsung Electronics needing 43-47 days and LG 46-48 in order to retrieve sale credits, which is relatively stable.

Another important mark in a company’s management is the cash flow through sales. This shows the company’s ability to create cash for investment and distribution. The cash flow of Samsung Electronics through sales in the first half of this year was 21.4179 trillion won (US$19.1690 billion), and the investment cash flow (tangible and intangible) was 20.859 trillion won (US$18.6688 billion). There is 560 billion won (US$501 million) left even after tangible and intangible investments of sales cash. The sales cash flow from the first half of last year was stable at 14.3587 trillion won (US$12.8510 billion), and investment cash flow too at 10.5972 trillion won (US$9.4845 billion).

Last year, LG Electronics had 1.84 trillion won (US$1.6468 billion) in sales cash flow and 480.5 billion won (US$430.0 million) in investment cash flow. The company was able to invest with its sales profits. But in the first half of this year, the company had 943.1 billion won (US$844.0 million) in sales cash flow when its investment cash flow was 1.3165 trillion won (US$1.1783 billion). In other words, the company was about 373.4 billion won (US$334.2 million) short to invest in cash through sales profits. This is why, toward the end of last month, LG Electronics issued 400 billion won (US$358 million) in corporate bonds to create cash flow through financial activities.