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Understanding One Important Aspect Of BreadTalk Group Limited’s Business – Inventory

BreadTalk Group Limited (SGX: 5DA) is a food company that has three main business segments: Bakery, Restaurant, and Food Atrium.

As a bakery/restaurant operator, BreadTalk purchases raw material in bulk, processes the raw material into finished products, and sells those products in its stores. This requires investment in working capital, mainly inventory and trade receivables.

In this article, thus, we will assess one part of the company’s working capital – inventory. What we want to know is how well the company is managing its inventory.

To do so, we will look at two things. First, the value of inventory in the last five years and second, the inventory days in the last five years.

Value of inventory

As a bakery operator, BreadTalk will likely want to have low inventory in relation to sales. As such, we hope to see inventory levels grow and contract in relation to sales. Better still, a declining inventory level over the years.

So how did BreadTalk’s inventory value change in the last 5 years? Let’s see below.


Source: BreadTalk 2012-2016 Annual Reports

To put the above into perspective, revenue and inventory have grown by 37% and 3%, respectively, from 2012 to 2016. In other words, inventory has remained relatively flat despite an increase in revenue.

Inventory days

In simple terms, inventory day indicates the average number of days that a business needs from buying its raw material to selling its finished products to customers.

The calculation that we will use here is closing inventory/ cost of sales x 365 days. Ideally, we would like to see a decline in inventory days.

So how has BreadTalk’s inventory days changed in the last 5 years? Let’s see below.

Source: BreadTalk 2012-2016 Annual Reports

Here, we see that inventory day has gone from about 17 to 13 during the period.

Conclusion

In summary, we see that BreadTalk’s inventory management has improved during the period, with better performances in both inventory level and 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.