======Trade Claims======
A Trade Claim is a legal right to payment held by a supplier against a company that has received goods or services but hasn't paid for them yet. Think of it as a corporate IOU. These claims are a routine part of business, appearing on a company's [[balance sheet]] under the line item [[Accounts Payable]]. For a healthy, growing company, having a reasonable amount of trade claims is perfectly normal; it's a sign that suppliers are confident enough in the company's financial stability to extend it short-term, interest-free credit. However, for the savvy [[value investor]], the story behind these numbers is a treasure trove of information. A sudden spike in trade claims can be a red flag, hinting that a company is struggling to manage its cash and is delaying payments. For investors with a stomach for risk, trade claims take on a second life in the world of [[financial distress]]. When a company enters [[bankruptcy]], its suppliers can sell their claims—often at a steep discount—to specialized investors who bet on recovering more than they paid during the company's restructuring or [[liquidation]].
===== Analyzing Trade Claims on the Balance Sheet =====
For most investors, trade claims are not something you buy, but something you analyze. They are a key component of a company's [[working capital]] and offer a window into its operational health and relationship with its suppliers.
==== A Sign of Health or Sickness? ====
When you look at a company's Accounts Payable, don't just look at the number—look at the trend and compare it to its peers.
  * **Rising Claims:** A significant increase in what a company owes its suppliers can mean two very different things. It could be a warning sign that the company is experiencing a cash crunch and is "stretching its payables," essentially using its suppliers as an unplanned credit line. On the other hand, it could simply be the result of strong sales growth, requiring more raw materials and inventory. The key is to check this against revenue growth. If payables are growing much faster than revenues, it's time to be cautious.
  * **Falling Claims:** A decrease might indicate disciplined cash management and prompt payments, which is great. It could also mean the business is slowing down and purchasing fewer goods and services.
A useful metric here is [[Days Payable Outstanding]] (DPO), which calculates the average number of days it takes a company to pay its suppliers. A high DPO relative to the industry average can signal either immense bargaining power over suppliers (like a corporate giant) or, more often, trouble paying the bills.
===== Investing in Trade Claims: A Special Situation =====
While analyzing Accounts Payable is a standard part of stock picking, actively buying and selling trade claims is a niche and risky investment strategy, typically the domain of [[hedge funds]] and [[distressed debt]] investors. It's a classic example of what [[Benjamin Graham]] called [[special situations]].
==== How It Works ====
Imagine a small parts manufacturer is owed $200,000 by a large automaker that has just filed for Chapter 11 bankruptcy. The legal process could take years, and the supplier might only get back a fraction of what it's owed. The supplier needs cash //now// to stay in business.
A distressed debt fund might approach the supplier and offer to buy its $200,000 claim for, say, $60,000 in cash (30 cents on the dollar). The supplier gets immediate liquidity, and the fund now owns the right to whatever payout the claim receives in bankruptcy court.
==== The High-Risk, High-Reward Bet ====
The fund is betting that the final recovery will be higher than the 30 cents on the dollar it paid. After months of due diligence, the fund's analysts might project that claims of this type will ultimately be paid out at 50 cents on the dollar. If they're right, their $60,000 investment will turn into a $100,000 payout ($200,000 x 0.50), netting a handsome profit.
Of course, the risk is immense. The bankruptcy proceedings could drag on longer than expected, or the company's assets could be worth less than anticipated, resulting in a lower payout—or even none at all.
===== Key Takeaways for the Everyday Investor =====
  * **For Stock Analysis:** Always check the Accounts Payable trend on a company's balance sheet. It's a powerful, often overlooked, indicator of operational health and cash management.
  * **As an Asset Class:** Recognize that trade claims are a specialized investment field. While fascinating, direct investment is generally not accessible or advisable for the average individual investor due to the high risk and need for specialized legal and financial expertise.