Getting A Grip On The Inventory Management Of Top Glove
The Malaysia-based Top Glove (SGX: BVA)(KLSE: 7113.KL) is the largest rubber gloves maker in the world with a market share of around 25%. It is dual-listed in both Singapore (since June 2016) and Malaysia (since March 2001).
As a gloves manufacturer, Top Glove carries a significant amount of inventory. As of 31 August 2016, Top Glove’s inventory value is RM 263.7 million. It is thus important for investors to look at how well Top Glove is managing its inventory.
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, 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 Top Glove’s revenue and inventory levels from FY2012 (fiscal year ended 31 August 2012) to FY2016:
Source: Top Glove’s financial statements
For the timeframe under study, Top Glove saw its inventory value grow by a total of 47%. That’s nearly twice the 25% growth rate of the company’s revenue.
Inventory days
Put simply, inventory days indicates the average number of days a company takes to clear its inventory. Ideally, 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 Top Glove’s inventory days from FY2012 to FY2016:
Source: Top Glove’s financial statements
As you can observe, the company’s inventory days has increased for the timeframe under study (from 34 in FY2012 to 47 in FY2016).
A Foolish conclusion
Given what we’ve observed – inventory growth that has outstripped revenue growth, and an increase in the inventory days – it appears that Top Glove’s management of its inventory has deteriorated from its FY2012 to FY2016.
