Arista Networks Inc. (NYSE:ANET)

The analysis of the operational efficiency ratios over the five-year period reveals several important trends and fluctuations.

Inventory Turnover

The inventory turnover ratio exhibits a declining trend from 1.74 in 2020 to a low of 1.15 in 2023, before partially recovering to 1.37 in 2024. This suggests a progressively slower rate of inventory movement through much of the period, indicating potential challenges in inventory management or shifts in sales patterns. Correspondingly, the average inventory processing period supports this observation, increasing from 210 days in 2020 to a peak of 318 days in 2023, then decreasing to 267 days in 2024, reflecting longer holding times before sales.

Receivables Turnover

The receivables turnover ratio shows some variability, decreasing from 5.95 in 2020 to 4.75 in 2022, then improving markedly to 6.14 by 2024. This improvement indicates better effectiveness in collecting receivables during the latter years. The average receivable collection period aligns with this trend, extending to 77 days in 2022 before shortening to 59 days by 2024, demonstrating enhanced cash collection efficiency.

Payables Turnover

Payables turnover exhibits notable fluctuations, dropping from 6.23 in 2020 to 5.27 in 2021, spiking to 7.33 in 2022, then declining again in 2023 before recovering to 6.59 in 2024. This volatility may reflect changing payment strategies or supplier terms. The average payables payment period also varies, peaking at 71 days in 2023 and falling to 50 days in 2022 and 55 days in 2024, indicating inconsistent payment practices over the years.

Working Capital Turnover

Working capital turnover generally improved from 0.76 in 2020 to 1.03 in 2022, implying enhanced utilization of working capital to generate sales. However, the ratio declined to 0.90 in 2023 and further to 0.76 in 2024, suggesting a reduction in operational efficiency or changes in investment in current assets and liabilities.

Operating Cycle

The operating cycle lengthened progressively from 271 days in 2020 to a high of 382 days in 2023, before contracting to 326 days in 2024. This indicates that the time taken to convert inventory and receivables into cash increased substantially before slightly improving, largely influenced by the inventory processing period and receivable collection patterns.

Cash Conversion Cycle

The cash conversion cycle mirrors the operating cycle's trend, increasing from 212 days in 2020 to 311 days in 2023, then decreasing to 271 days in 2024. This measure highlights the overall time duration between cash outflows and inflows, with a longer cycle indicating an extended period for cash to be tied up in operations. The increase suggests potential liquidity challenges or inefficiencies in working capital management during the middle years, with some improvement noted in the most recent year.

In summary, the data exhibits a period of declining operational efficiency particularly evident in inventory management and receivable collection during 2021 and 2022, followed by a gradual recovery in 2023 and 2024. The variability in payables turnover and payment periods indicates fluctuating supplier management strategies. While working capital turnover showed initial improvement, the recent declines may warrant further investigation to understand underlying causes affecting short-term asset and liability utilization.

The analysis of the financial data reveals several significant trends in cost of revenue, inventories, and inventory turnover over the five-year period from December 31, 2020, through December 31, 2024.

Cost of Revenue

The cost of revenue has exhibited a consistent upward trajectory throughout the period. Starting at approximately $836 million in 2020, it increased to around $1.07 billion in 2021. This growth continued at an accelerated pace, reaching approximately $1.71 billion in 2022, and further rising to about $2.23 billion in 2023. By the end of 2024, the cost of revenue reached around $2.51 billion. This pattern indicates expanding operational scale or increased production costs, reflecting the company's growing business activity or possibly rising input expenses.

Inventories

Inventories have shown a steep increase from roughly $480 million in 2020 to $650 million in 2021. A more pronounced surge can be seen from 2021 to 2022, when inventories nearly doubled, reaching nearly $1.29 billion. The upward trend continued into 2023 with inventories peaking at approximately $1.95 billion. Interestingly, in 2024, inventories decreased somewhat to about $1.83 billion, suggesting a possible inventory management adjustment or changes in demand forecasts during that year.

Inventory Turnover

The inventory turnover ratio has gradually declined over the observed period, beginning at 1.74 in 2020 and decreasing slightly to 1.64 in 2021. It then fell to 1.32 in 2022 and reached its lowest point at 1.15 in 2023. In 2024, the turnover ratio improved moderately to 1.37. The downward trend in turnover ratio over most of the period points to slower movement of inventory relative to cost of revenue, potentially signaling increased inventory holding or slower sales velocity. The partial rebound in 2024 may indicate efforts to optimize inventory levels or changes in sales dynamics.

Revenue Trend

Revenue exhibited a consistent and robust upward trend over the analyzed period. Starting at approximately 2.32 billion USD in 2020, it increased steadily each year, culminating in around 7.00 billion USD in 2024. This reflects substantial growth, more than tripling revenues in four years, indicating strong business expansion and increasing market demand.

Accounts Receivable, Net

The net accounts receivable also showed a significant rise during the period, moving from roughly 390 million USD at the end of 2020 to approximately 1.14 billion USD by the end of 2024. This increase aligns with the growing revenue, suggesting higher outstanding customer balances consistent with increased sales volume.

Receivables Turnover Ratio

The receivables turnover ratio indicates how effectively the company manages its accounts receivable. It started at 5.95 in 2020 and declined in 2021 to 5.71, followed by a more marked decline to 4.75 in 2022. This dip might imply slower collection or extended credit terms amid the revenue growth. However, the ratio recovered in subsequent years, increasing to 5.72 in 2023 and further to 6.14 in 2024, suggesting an improvement in receivables management or collections efficiency by the end of the examined period.

Overall Assessment

The company's financials demonstrate strong revenue growth accompanied by a rise in accounts receivable. Although there was a temporary decline in receivables turnover ratio between 2020 and 2022, the ratio improved in the following years, indicating enhanced efficiency in collecting receivables. This balance between growth and working capital management suggests concerted efforts to control credit risk while expanding sales.

Cost of Revenue

The cost of revenue has demonstrated a consistent upward trend throughout the observed periods. Starting at approximately US$836 million in 2020, it increased significantly each year, reaching about US$2.51 billion by 2024. This consistent increase suggests expanding operational scale or rising costs associated with producing goods or services over time.

Accounts Payable

Accounts payable also showed an overall increasing trend between 2020 and 2024, moving from roughly US$134 million in 2020 to US$381 million in 2024. However, there was a notable peak in 2023 where accounts payable surged to about US$435 million before decreasing the following year, indicating possible fluctuations in the company's credit terms or payment cycles with suppliers within this timeframe.

Payables Turnover Ratio

The payables turnover ratio displayed variability over the five-year period. It started at 6.23 in 2020, declined to 5.27 in 2021, then rose substantially to 7.33 in 2022. This was followed by a decline to 5.13 in 2023, and a rebound to 6.59 in 2024. The oscillations in this ratio point to inconsistent payment patterns and changes in the speed at which the company settles its accounts payable, reflecting shifts in working capital management practices or supplier negotiations.

Working Capital

The working capital has shown a consistent and substantial increase over the five-year period. Starting at approximately 3.07 billion USD in 2020, it increased steadily each year, reaching over 9.18 billion USD by the end of 2024. This significant growth indicates an improving liquidity position and possibly more efficient management of current assets and liabilities.

Revenue

Revenue has also experienced strong growth throughout the observed years. Beginning at about 2.32 billion USD in 2020, it increased to approximately 7.0 billion USD by the end of 2024. This upward trend reflects successful business expansion or increased market demand, with the most substantial absolute revenue gains occurring between 2021 and 2022 and continuing with strong momentum thereafter.

Working Capital Turnover

The working capital turnover ratio presents some fluctuation over the period. It increased from 0.76 in 2020 to a peak of 1.03 in 2022, indicating an initial improvement in generating revenue from working capital. However, the ratio declined to 0.90 in 2023 and further to 0.76 in 2024, returning to its initial level. This trend suggests that while the company expanded its working capital significantly, the efficiency of utilizing this capital to generate revenue decreased in the last two years, potentially due to more conservative asset management or slower revenue growth relative to working capital.

Overall Analysis

Over the five-year span, the company has demonstrated notable growth in both liquidity and revenue. The increase in working capital is more pronounced than the rise in revenue, especially in the final two years, which corresponds to the observed decline in working capital turnover ratio. This could imply a strategic choice to maintain higher liquidity buffers or investments in short-term assets. The initial improvement in turnover ratio, followed by its decline, requires further examination to understand whether it signals a shift in operational efficiency or changes in business strategy.

Inventory Turnover

The inventory turnover ratio demonstrates a declining trend from 1.74 in 2020 to a low of 1.15 in 2023, indicating a reduction in how efficiently inventory is being sold and replaced over the years. However, there is a slight improvement in 2024, where the ratio increases to 1.37, suggesting a modest recovery in inventory management efficiency.

Average Inventory Processing Period

The average inventory processing period shows an upward trend from 210 days in 2020 to a peak of 318 days in 2023, reflecting an increasing length of time inventory remains on hand before being sold. This indicates slower inventory turnover. In 2024, the processing period decreases to 267 days, aligning with the observed improvement in inventory turnover ratio for that year.

Overall Insights

Over the five-year period, inventory management efficiency initially deteriorated, as evidenced by a declining inventory turnover ratio and lengthening inventory processing period. The peak inefficiency occurs in 2023. However, the data from 2024 suggests a reversal of this trend, with improved turnover and reduced processing time, potentially indicating better inventory control or increased sales velocity during the most recent year.

The analysis of the receivables turnover and average receivable collection period over the five-year period reveals notable trends in the company's efficiency in managing its accounts receivable.

Receivables Turnover Ratio

The receivables turnover ratio demonstrates some fluctuations throughout the periods. It began at 5.95 in 2020, decreased to 5.71 in 2021, and further declined significantly to 4.75 in 2022. Subsequently, it rebounded to 5.72 in 2023 and improved further to 6.14 in 2024. The initial decline indicates a decreasing ability to collect receivables efficiently, while the recovery in the last two years suggests an enhanced collection process or improved credit management.

Average Receivable Collection Period

This metric, representing the average number of days to collect receivables, corresponds inversely to the receivables turnover ratio. It increased from 61 days in 2020 to a peak of 77 days in 2022, indicating slower collections during that year. In subsequent years, the collection period shortened to 64 days in 2023 and further to 59 days in 2024, indicating improved collection efficiency.

Overall Interpretation

The trends suggest that the company experienced challenges in its receivables management around 2021 and 2022, resulting in slower collection and lower turnover. However, starting in 2023, there was a positive turnaround, with both the turnover ratio increasing above prior levels and the average collection period decreasing to its shortest duration in five years. This improvement can be indicative of enhanced credit policies, better customer payment behaviors, or more effective collection efforts.

Average inventory processing period

The average inventory processing period shows an initial increasing trend from 210 days in 2020 to 318 days in 2023, indicating longer durations to process inventory. However, in 2024, there is a notable decline to 267 days, suggesting some improvement in inventory turnover efficiency compared to the previous year but still higher than in 2020 and 2021.

Average receivable collection period

The average receivable collection period exhibits moderate fluctuations. It increased from 61 days in 2020 to 77 days in 2022, indicating slower collection of receivables during this period. This was followed by a reduction to 64 days in 2023 and further improvement to 59 days in 2024, suggesting a positive trend in receivables management and cash inflow speed in the most recent years.

Operating cycle

The operating cycle lengthened significantly from 271 days in 2020 to 382 days in 2023, driven primarily by the increase in the inventory processing period. However, in 2024, the operating cycle decreased to 326 days, reflecting the improvements seen in both inventory processing and receivables collection periods. Despite this reduction, the operating cycle remains longer than in the earlier years, indicating ongoing challenges in overall operational efficiency.

Payables Turnover

The payables turnover ratio fluctuated over the observed periods, starting at 6.23 in 2020, decreasing to 5.27 in 2021, then increasing significantly to 7.33 in 2022. Subsequently, it declined to 5.13 in 2023 before rising again to 6.59 in 2024. These variations suggest an inconsistent pace in settling payables, with periods of both accelerated and decelerated payment activity.

Average Payables Payment Period

The average number of days taken to pay payables showed an inverse relationship to the payables turnover ratio. It increased from 59 days in 2020 to 69 days in 2021, indicating slower payments. This was followed by a decrease to 50 days in 2022, reflecting faster payments. The payment period then extended again to 71 days in 2023, before shortening to 55 days in 2024. These fluctuations mirror changes in the company's cash management and payment policies over time.

Overall Analysis

Throughout the observed timeframe, the company's payables metrics depict a cyclical pattern of payment behavior. The variations in turnover and payment period suggest responsiveness to operational or liquidity considerations, with no clear trend toward consistently faster or slower payment cycles. The alternating increases and decreases imply adaptive management of supplier payments possibly influenced by broader financial strategies or external conditions impacting cash flow.

Average Inventory Processing Period

The average inventory processing period shows an increasing trend from 210 days in 2020 to a peak of 318 days in 2023, before decreasing to 267 days in 2024. This indicates that the company took progressively longer to process inventory over the first four years, followed by a notable improvement in 2024.

Average Receivable Collection Period

The average receivable collection period increased from 61 days in 2020 to 77 days in 2022, implying a slower collection of receivables. However, it improved substantially in the following two years, reaching 59 days in 2024, which is even faster than in 2020.

Average Payables Payment Period

The average payables payment period fluctuated significantly over the period. It increased initially from 59 days in 2020 to 69 days in 2021, dropped sharply to 50 days in 2022, then rose again to 71 days in 2023, and finally declined to 55 days in 2024. This volatility suggests changing payment strategies or conditions affecting supplier payments.

Cash Conversion Cycle

The cash conversion cycle increased steadily from 212 days in 2020 to a high of 311 days in 2023, reflecting a lengthening in the overall operating cycle. In 2024, there was a reduction to 271 days, indicating some improvement in the company's efficiency in converting investments in inventory and receivables back into cash.