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Assessing ExxonMobil’s working capital management

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What is working capital?

Let’s analyze ExxonMobil’s (XOM) working capital (or WC) management over the years—a key thing to watch in order to understand how a company manages its short-term assets and liabilities.

WC includes cash locked up in inventories (an asset), cash to be received from customers (accounts receivable, or AR, an asset), and cash to be paid to vendors (accounts payable, or AP, a liability). Ideally, a company should have as little money as possible locked up in these things so the money can be used elsewhere more productively.

Receivables and inventories should be as low as possible, and payables should be at comfortable levels.

More importantly, the average amount of time cash remains locked in these items—and the ratio of credit sales and vendor purchases to these items, respectively—also matters. The former is measured by the number of “days outstanding,” while the latter is measured by “turnover ratios.”

A company with receivables pending for longer is in effect “lending money” to customers for longer, while one with payables pending for longer is “borrowing money” from vendors for longer—both without interest.

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Accounts receivable

XOM’s AR turnover has been rising and its days sales outstanding have been falling, indicating it has been managing payments from customers very well.

Inventories

XOM’s inventories have been rising—not a good thing during falling energy prices—causing its inventory turnover (sales or cost of goods divided by inventories) to fall. This is also a bad thing.

Its days inventory outstanding and inventory to cash days have also risen, indicating longer periods for inventories (including those under “manufacture”) to get converted to sales and cash, respectively.

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Accounts payable

XOM’s AP turnover and days of payables outstanding have been a little volatile, but within a relatively narrow range.

Putting it all together

XOM seems to be losing some of its advantage in its working capital management, measured in terms of the time each dollar is locked up in its “manufacturing” cycle.

This is mainly due to its ballooning inventories. ExxonMobil held inventories worth ~$18 billion as of 3Q14. At the end of this quarter, Chevron (CVX), BP (BP), and Total SA (TOT) held inventories worth ~$7.3 billion, ~$26.5 billion, and ~$21 billion, respectively.

Given their smaller inventory levels, XOM and CVX should stand out. They’re the top two holdings of the Energy Select Sector SPDR Fund (XLE).

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