Zoetis Inc. (NYSE:ZTS)

The financial data reveals several notable trends in the company's operational efficiency and cash management metrics over the five-year period ending in 2023.

Inventory Turnover and Average Inventory Processing Period

The inventory turnover ratio has steadily declined from 1.41 in 2019 to 1.00 in 2023, indicating slower movement of inventory. Correspondingly, the average inventory processing period has increased significantly from 258 days to 365 days, suggesting that inventory is held for increasingly longer durations before sale.

Receivables Turnover and Average Receivable Collection Period

The receivables turnover ratio improved notably from 5.76 in 2019 to a peak of 6.86 in 2021, followed by a slight decrease to 6.55 in 2023. This suggests a generally efficient collection process with minor easing in the most recent years. The average receivable collection period reflects this trend, decreasing from 63 days in 2019 to around 53-56 days in subsequent years, indicating consistent recovery of receivables within a stable timeframe.

Payables Turnover and Average Payables Payment Period

Payables turnover experienced a sharp decline from 6.62 in 2019 to 4.50 in 2020, then a gradual recovery to 6.23 in 2023. Inversely, the average payables payment period increased from 55 days to 81 days in 2020, before progressively shortening to 59 days by 2023. This reflects a temporary extension in payment timelines during 2020, normalizing in the following years.

Working Capital Turnover

The working capital turnover ratio dropped from 2.13 in 2019 to 1.50 in 2020 and remained relatively stable around 1.5–1.51 through 2021. Thereafter, it improved to 1.86 in 2022 and slightly to 1.92 in 2023, suggesting a moderate recovery in the efficient utilization of working capital.

Operating Cycle

The operating cycle extended considerably from 321 days in 2019 to 421 days in 2023. This increase is primarily driven by a longer inventory processing period, partially offset by steady receivables collection times.

Cash Conversion Cycle

The cash conversion cycle remains high and has increased from 266 days in 2019 to 362 days in 2023. This indicates longer periods between cash outflows for inventory and payables and cash inflows from receivables, representing a growing investment in net operating working capital.

Overall, the data suggests that the company is experiencing longer inventory holding times and extended operating and cash conversion cycles, which could signal increasing capital tied up in operations. While receivables collection remains relatively efficient and payables management has normalized after a temporary extension, the slower inventory turnover and increased inventory days warrant attention to improve operational liquidity and efficiency.

Cost of Sales

The cost of sales exhibited a consistent upward trend over the five-year period. Starting at 1,992 million USD in 2019, it increased to 2,561 million USD in 2023. This growth indicates a steady rise in expenses directly tied to the production of goods or services.

Inventories

Inventories significantly increased from 1,410 million USD in 2019 to 2,564 million USD in 2023. The inventory levels showed a continuous growth each year, suggesting accumulating stock or possibly slower turnover in comparison to sales growth.

Inventory Turnover Ratio

The inventory turnover ratio declined steadily from 1.41 in 2019 to 1.0 in 2023. This downward trend implies that inventory is being sold or used at a slower rate relative to previous years. The decrease in turnover ratio may indicate increased holding periods for inventory or growing inventory levels not matched by proportional sales increases.

Overall Analysis

The data reveals a scenario where both cost of sales and inventories are rising, but inventories are increasing at a comparatively higher rate, as reflected by the decreasing inventory turnover ratio. This trend could suggest potential inefficiencies in inventory management or changes in demand patterns. Continuous monitoring of inventory levels relative to sales will be crucial to ensure optimal operational efficiency and working capital management.

Revenue

Revenue has shown a consistent upward trend over the five-year period, increasing from 6,260 million US dollars in 2019 to 8,544 million US dollars in 2023. The growth rate appears to accelerate notably between 2020 and 2021, with a substantial increase of approximately 16.5%, followed by more moderate but steady growth in the subsequent years.

Accounts Receivable, Less Allowance for Doubtful Accounts

Accounts receivable has also increased year over year, rising from 1,086 million US dollars in 2019 to 1,304 million US dollars in 2023. The growth in receivables is relatively consistent and parallels the trend in revenue growth, suggesting that the company's credit sales volume has expanded in line with its overall sales.

Receivables Turnover

The receivables turnover ratio demonstrates an improving efficiency from 2019 to 2021, rising from 5.76 to 6.86, which indicates an enhanced ability to collect receivables more quickly during this interval. However, from 2021 onwards, the ratio shows a slight decline, reaching 6.55 by 2023. This suggests a minor reduction in collection efficiency or a lengthening of the average collection period despite increasing revenue and accounts receivable balances.

Cost of Sales

The cost of sales has shown a consistent upward trend over the five-year period. Starting at 1,992 million US dollars in 2019, it increased each year to reach 2,561 million US dollars in 2023. This represents an overall increase of approximately 28.6% from the initial value. The steady rise suggests increased operational activity or higher costs associated with production or procurement.

Accounts Payable

Accounts payable experienced notable fluctuation during the period. Initially, it rose significantly from 301 million US dollars in 2019 to 457 million in 2020. Subsequently, it decreased to 436 million in 2021, continued to decline to 405 million in 2022, and then saw a slight increase to 411 million in 2023. The initial spike followed by a gradual decline and slight rebound indicates possible changes in payment policies or supplier terms.

Payables Turnover Ratio

The payables turnover ratio, which measures how quickly the company pays off its suppliers, exhibited variability across the years. It decreased markedly from 6.62 in 2019 to 4.50 in 2020, indicating a slower payment cycle or extended credit period. Following this dip, the ratio improved steadily over the next three years to 5.28 in 2021, 6.06 in 2022, and 6.23 in 2023, approaching, but not quite reaching, the initial level. This pattern suggests a temporary extension of payment terms in 2020 with a subsequent return towards faster payment practices.

The financial data over the five-year period ending December 31, 2023, reveals several pertinent trends related to working capital, revenue, and working capital turnover.

Working Capital

Working capital experienced growth from 2019 through 2021, increasing from $2,942 million to $5,133 million. This was followed by a decline in 2022 to $4,339 million, and a slight recovery in 2023 to $4,454 million. Overall, while the working capital increased significantly over the first three years, the last two years reflect some volatility and a reduction from peak levels.

Revenue

Revenue demonstrated consistent growth throughout the entire period. The figures rose from $6,260 million in 2019 to $8,544 million in 2023, representing a steady upward trajectory. This steady increase in revenue indicates positive sales momentum and expanding business activity.

Working Capital Turnover

The working capital turnover ratio showed a declining trend from 2.13 in 2019 to 1.5 in 2020, maintaining almost the same level at 1.51 in 2021. However, it improved subsequently, reaching 1.86 in 2022 and 1.92 in 2023. This suggests that while efficiency in utilizing working capital to generate revenue initially weakened, it improved in the latter years, approaching but not fully recovering to the 2019 level.

In summary, the company successfully expanded its revenue base steadily during the period, although working capital levels fluctuated, with a peak in 2021 followed by a decline and partial recovery. The working capital turnover ratio initially deteriorated but showed signs of improvement in the last two years, indicating better management of working capital relative to revenue generation in the recent period.

Inventory Turnover

The inventory turnover ratio shows a declining trend over the analyzed period. Starting at 1.41 in 2019, it gradually decreases each year, reaching 1.00 by the end of 2023. This implies that the frequency with which inventory is sold and replaced has slowed down over time.

Average Inventory Processing Period

The average inventory processing period exhibits a consistent upward trend. It increases from 258 days in 2019 to 365 days in 2023, indicating that the company is taking progressively longer to process and clear its inventory.

Overall Analysis

The inverse relationship between the inventory turnover ratio and the average inventory processing period is evident. As the inventory turnover decreases, the time taken to process inventory increases. This pattern suggests a potential slowdown in inventory movement, which could be due to factors such as slower sales, overstocking, or changes in inventory management practices. The continual increase to a full year average processing period by 2023 may warrant further investigation to assess operational efficiency and working capital utilization.

Receivables turnover

The receivables turnover ratio exhibits a positive trend from 2019 to 2021, increasing from 5.76 to 6.86. This indicates an improvement in the efficiency of collecting receivables during this period. However, there is a slight decline in the subsequently years, recording 6.65 in 2022 and 6.55 in 2023, suggesting a minor reduction in collection efficiency but overall maintaining relatively high turnover compared to the initial year.

Average receivable collection period

The average receivable collection period decreases significantly from 63 days in 2019 to 53 days in 2021, consistent with the increase in receivables turnover, indicating a faster collection of receivables. After 2021, the collection period slightly increases to 55 days in 2022 and 56 days in 2023, reflecting a marginal slowdown in collecting receivables but still an improvement compared to 2019.

Overall analysis

The data reveals an overall enhancement in receivables management from 2019 to 2021, with faster collection and higher turnover ratios. Although there is a modest reversal in these favorable trends in the last two years, the performance remains improved compared to the starting point in 2019. The slight decline towards the end may warrant monitoring to ensure continued efficiency in receivables management.

Average Inventory Processing Period

The average inventory processing period demonstrates a consistent upward trend from 2019 through 2023, increasing from 258 days to 365 days. This indicates that the company has been taking progressively longer to process inventory over the years, suggesting either increased inventory levels or slower turnover rates.

Average Receivable Collection Period

The average receivable collection period shows a relatively stable pattern with minor fluctuations. It decreased from 63 days in 2019 to 53 days in 2021, indicating improved efficiency in collecting receivables during that period. However, it slightly increased again to 56 days by 2023, suggesting a minor relaxation in collection efforts or changes in credit terms.

Operating Cycle

The operating cycle has lengthened steadily across the five years, moving from 321 days in 2019 to 421 days in 2023. This reflects the combined effect of longer inventory processing and relatively stable receivable collection periods. The extended operating cycle could imply increased working capital requirements and potential impacts on cash flow management.

Payables Turnover

The payables turnover ratio exhibited a fluctuating trend over the observed period. Beginning at 6.62 in 2019, it experienced a significant decline to 4.5 in 2020, indicating a slower rate of payables settlement. Subsequent years saw a recovery, with the ratio increasing to 5.28 in 2021, then further to 6.06 in 2022, and reaching 6.23 in 2023. This upward trend from 2020 onwards suggests improving efficiency in managing payables.

Average Payables Payment Period

The average payables payment period reflected an inverse pattern relative to the payables turnover ratio. Starting at 55 days in 2019, the period extended substantially to 81 days in 2020, representing delayed payments. It then decreased to 69 days in 2021 and continued the decline to 60 days in 2022 and 59 days in 2023. This gradual reduction indicates a trend toward quicker payment of obligations following the peak delay in 2020.

Overall Analysis

The data reveals a temporary deterioration in payable management efficiency in 2020, characterized by a lower turnover ratio and a prolonged payment period. From 2021 onwards, a consistent improvement is evident, as payables turnover increases and the payment period shortens. These trends suggest enhanced financial discipline and possibly improved cash flow management in the latter years.

Average Inventory Processing Period

The average inventory processing period has shown a consistent upward trend over the five-year period. Starting at 258 days in 2019, it increased steadily each year, reaching 365 days by 2023. This indicates a lengthening time for inventory to be processed, which may suggest slower inventory turnover or increasing inventory levels.

Average Receivable Collection Period

The average receivable collection period experienced a decrease from 63 days in 2019 to 53 days in 2021, indicating improved efficiency in collecting receivables during that time. However, from 2021 onwards, it slightly increased again, reaching 56 days by 2023, though it remains below the initial 2019 figure.

Average Payables Payment Period

The average payables payment period displayed more variability. It rose sharply from 55 days in 2019 to a peak of 81 days in 2020, suggesting delayed payments to suppliers or extended credit terms during that year. Thereafter, it decreased progressively to 59 days by 2023, nearing the 2019 level, which points to a normalization in payment practices.

Cash Conversion Cycle

The cash conversion cycle shows an overall increasing trend. It started at 266 days in 2019, slightly decreased to 263 days in 2020, then rose again consistently each year to reach 362 days in 2023. This extension indicates that the company is taking more time to convert its investments in inventory and receivables into cash, which may impact liquidity.