How Has Apple’s Cash Conversion Cycle Changed Over The Years?

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Apple (NASDAQ:AAPL) stands out among companies with a retail-driven business model due to its negative cash conversion cycle (CCC) – which signifies that the technology giant largely runs its supply chain through credit extended by its vendors. Apple’s CCC figure has declined steadily from -56 days in FY’14 to almost -86 days in FY’17, as its accounts payable has grown at a much faster rate than its inventory as well as accounts receivable. As we detail in our interactive dashboard analysis on Apple’s cash conversion cycle, we expect this figure to improve further to reach -97 days by FY’19.

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, therefore, indicates how efficiently a company is managing its working capital and generating cash flows. While this figure varies considerably across industries and sectors, it is usually comparable for companies in the same sector. With a negative cash conversion cycle figure, Apple has an extremely efficient and favorable supply chain finance arrangement. And we only expect this to get better over the coming years.

We draw our conclusions based on our forecasts for three underlying metrics:

  • Days Inventory Outstanding (DIO), which represents the number of days it takes for Apple to clear its inventory. This figure decreased slightly from 6.9 days in FY’14 to 5.9 days in FY’16 before jumping to 12.6 in FY’17 as weaker-than-expected sales weighed on the inventory figure. Apple’s inventory turnover is extremely quick thanks to its efficient demand planning process, its use of contract manufacturers, and its streamlined product portfolio. As detailed in the chart below, we expect Apple’s DIO figure to increase to 15.4 days by FY’19
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  • Days Sales Outstanding (DSO), which represents the number of days it takes for Apple to realize payments from distributors. This figure was around 26 days in FY’15 and FY’16, but nudged higher to 29 days in FY’17 as accounts receivable increased at a faster rate than revenues. Apple’s DSO figure is notably low as it has a sizable retail operation – allowing it to realize cash or credit card payments for a large percentage of its sales immediately. As detailed in the chart below, we expect Apple’s DSO figure to fall to below 25 days by FY’19.

  • Days Payable Outstanding (DPO), which represents the number of days Apple takes to make payments to its vendors. This figure has increased from around 100 days over FY’14-16 to almost 127 days in FY’17 as Apple benefited from spreading out the sourcing of its inputs across suppliers. Historically, Apple’s DPO figure has been high as the company’s premium market position and large volumes allow it to negotiate better credit terms with its vendors. As detailed in the chart below, we expect Apple’s DSO figure to continue to increase and cross 136 days by FY’19.

Using the forecasts above, as the Cash Conversion Cycle (CCC) = DIO + DSO – DPO, we estimate a decrease in Apple’s CCC from -86 days in FY’17 to -89 days in FY’18 and further to -97 days in FY’19. The subsequent decline can be attributed to the fact that the increase in DPO exceeds the combined increase in DIO and DSO. If you disagree with any of our forecasts or assumptions, you can modify them using our interactive dashboard and see the resulting impact on the CCC.

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