Southwestern Energy’s working capital management

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What’s working capital?

Let’s analyze Southwestern Energy Company’s (SWN) working capital, or WC, management over the years.

WC is a key thing to watch to understand how a company manages its short-term assets and liabilities. It includes cash that’s locked-up in inventories, an asset—cash to be received from customers, or accounts receivable, also an asset—and cash to be paid to vendors, or accounts payable, a liability.

SWN2 - P2

Ideally, a company should have as little money as possible locked up, so it can grow the business, or increase shareholder returns. So, accounts receivable, or AR, and inventories should be as low as possible, and accounts payable, AP, should be at comfortable levels.

SWN’s AR and AP have been rising over the years, which is natural as a company’s business grows. More important is how long cash remains locked up. The ratio of credit sales to vendor purchases also matters.

“Days outstanding” measures the number of days cash remains locked up. “Turnover ratios” measures the ratio of credit sales to vendor purchases.

A company with receivables pending for longer is in effect lending money to customers for longer. A company with payables pending for longer is borrowing money from vendors for longer. No interest accrues in either scenario.

Accounts receivable

SWN’s AR turnover and days sales outstanding have stayed quite stable, indicating the company has been managing payments from customers well.

Inventories

SWN’s average inventories have stayed relatively stable even as the company’s production has soared, causing its inventory turnover—sales or cost of goods divided by inventories—to rise. That’s also a good thing.

Its days inventory outstanding and inventory to cash days have also plummeted, indicating shorter periods before inventories—including those in the manufacture category—get converted to sales and cash, respectively.

Accounts payable

The rising trend in SWN’s AP turnover, and declining trend in days payables outstanding, indicate that the company’s been paying off its vendors sooner. This indicates a waning advantage.

Cash conversion

Putting it all together, though SWN’s been paying vendors off sooner, the company still seems to be getting paid by customers far sooner and more frequently—a good position to be in.

Key peers and ETFs

SWN operates in the upstream energy industry, which is tracked by the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). The XOP also counts Athlon Energy Inc (ATHL), EQT Corporation (EQT), and Cabot Oil & Gas Corporation (COG) among its major holdings.

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