How Investors Can Understand 1 Crucial Aspect Of Riverstone Holdings Limited’s Business: Inventory Management

Riverstone Holdings Limited (SGX: AP4)  is a rubber gloves manufacturer that makes gloves used in two key markets: Cleanrooms and healthcare.

The company may be interesting to some investors because of its long-term stock market performance. Over the past five years, Riverstone’s stock price has climbed 307%.

As a gloves manufacturer, Riverstone processes raw materials – such as butadiene – into finished products, which are generally sold to customers on a credit basis. As such, the company’s operations require working capital.

Working capital is defined as current assets minus current liabilities. As of 31 December 2016, the company has working capital of RM 222 million.

Given Riverstone’s working capital requirements, it is important that the company handles this aspect of its business well.

Inventory management represents one facet of working capital. In here, I want to assess how well the company has been managing its inventory in its last five fiscal years.

To do so, I will look at two things: (1) Changes in the value of the company’s inventory as compared to changes in revenue; and (2) the day sales of inventory number, which is also known as inventory days.

Changes in inventory value

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

Here’s a chart showing Riverstone’s revenue and inventory from 2012 to 2016:

Riverstone revenue and inventory chart
Source: Riverstone’s financial statements from 2012 to 2016

For the period under study, Riverstone has seen its revenue and inventory grow by 111% and 120%, respectively. In other words, the rate of growth of the value of Riverstone’s inventory is only marginally ahead of revenue.

Inventory days

Put simply, inventory days indicates the average number of days a company takes to clear its inventory. Ideally, we what we want to see is a stable or declining inventory days.

The metric is calculated with the following formula:

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

The chart below plots Riverstone’s inventory days from 2012 to 2016:

Riverstone inventory days
Source: Riverstone’s financial statements from 2012 to 2016

We can see that Riverstone’s inventory days has increased from 47 in 2012 to 58 in 2015, before declining to 51 in 2016.

A Foolish conclusion

Given what we’ve observed – inventory growth that has marginally outstripped revenue growth, and a higher inventory days – Riverstone’s inventory management appears to have weakened slightly from 2012 to 2016.

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