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How Investors Can Understand 1 Crucial Aspect Of Sheng Siong Group Ltd’s Business: Inventory Management

Sheng Siong Group Ltd (SGX: OV8), which listed on August 2011, is one of the largest supermarket chains in Singapore. The company’s network of 42 supermarkets in the Garden City are located primarily in the heartlands.

Sheng Siong could be of interest to some investors given its solid long-term stock market performance. Since the close of its trading debut, Sheng Siong’s shares are up by 179%.

As a retailer, Sheng Siong purchases goods in bulk for resale in its stores across Singapore. This makes the management of inventory very important for the company.

In here, I want to assess how well Sheng Siong has been managing its inventory over its last five fiscal years. To do so, I will study two things: (1) Changes in the company’s inventory value compared to changes in revenue; and (2) the inventory days, which is also known as day sales of inventory.

Value of inventory

The ideal case here is to see inventory levels that decline while revenue increases. If not, we’d want to see inventory levels ebb and flow along with revenue.

Here’s a chart showing Sheng Siong’s revenue and inventory over its last five fiscal years:

Sheng Siong revenue and inventory
Source: Sheng Siong’s annual reports

From 2011 to 2015, Sheng Siong’s revenue and inventory have grown by 32% and 44% respectively. In other words, inventory has increased at a faster pace as compared to revenue.

Inventory days

Put simply, inventory day indicates the average number of days that a business takes to clear its inventory. For example, an inventory days of 50 means there’s an average of 50 days between a retailer buying inventory from its supplier and selling the inventory to customers. Ideally, what we want to see is a stable or declining day sales of inventory.

The metric is calculated with the following formula:

(Closing inventory) / (Cost of sales) x (365 days)

The chart below plots Sheng Siong’s inventory days from 2011 to 2015:

Sheng Siong inventory days
Source: Sheng Siong’s annual reports

What’s worth noting here is that Sheng Siong’s inventory days has increased from 29 to 33 for the period under study.

A Foolish conclusion

In sum, we can observe that Sheng Siong’s inventory management has deteriorated slightly from 2011 to 2015 given the faster increase in inventory value as compared to revenue and the higher inventory days.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.