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QuestionsCategory: Financials QuadrantIncrease in inventory turnover days and cash conversion cycle days
sparklewonder asked 6 months ago

Hi, I was inputting the numbers into the template when I realised that the inventory turnover days and cash conversion cycle days increased from year 2017 till year 2020.
I was wondering whether this increase can be due to the acquisition of equity stake in other entities? Or did I input my numbers incorrectly? 
 

6 Answers
Victor Chng answered 6 months ago

Hi Sparklewonder, 
 
You may want to let me know the company name and send me the excel to take a look. From there, I can give you a much accurate input. 

sparklewonder replied 6 months ago

Hi Victor,
I’m analysing UMS Holdings.

I’m not able to upload an excel file though. Would a screenshot suffice? Or is there an email address I can send to ?

Victor Chng replied 6 months ago

Hi Sparklewonder,

You can send the excel to victor@fifthperson.com

Victor Chng answered 6 months ago

Hi Sparklewonder,
 
I found some errors in collection of financial numbers. Let me point it out below:
 
1.The cost of good sold should be Raw material purchases and subcontractor charges instead of changes in inventories.

2.Changes in inventories (COI) should be viewed as one-off item. This figure is derived when the company increase or decrease in inventories. It is a type of special accounting only for certain business that rely heavy on inventory. So for instance, if you look at UMS’ 2020 figure, the COI is 2,192 it is the same amount of increase when you look into the balance sheet under inventories. (taking 53,938 minus 51,746). Hence, if it is a positive figure you have to subtract from your net profit and if negative then you have to add back to your net profit.

3.SGA figure should be the sum of Employee benefits expense, Depreciation expense, Other expenses and Other charges. (2020: 48,382)

4.Profit should always take profit attributable to owners of the parent which is 36,471 for 2020.
 
5.Total Equity should take Total Equity before non-controlling interest (sometime called equity attributed to owners of the parent) which is 251,286 (2020)
 
6.Capex is just Purchase of property, plant and equipment which is 11,588 (2020)
 
7.Dividend per share should be 0.05 (2020). 
 
Additional Comment:

  • I noticed some of your 2020 figure are actually 2019 figure which you may have mixed up when collecting it. 
  • Next time when you collect financial numbers for the excel, do it in million (rounding to one decimal place) so that you don;t collect so many numbers.

Hope this helps :)

sparklewonder replied 6 months ago

Hi Victor,

Thank you ! Your feedback has been very helpful. I will review my numbers again over the weekend.

Before that, can I check with you about a few points you made above?

1. For the COI, why do I have to subtract from net profit if it is positive and add back to your net profit if it is negative?

2. Profit should be taken attributable to owners of the parent, is the reason being that the parent holds the controlling interest and is more objective to do so?

3. For capex, isn’t improvement to property & associate considered a capital expenditure? since it increases the value of the property?

Thanks for pointing that my 2019 and 2020 figures are mixed up. I ought to redo it again.

Victor Chng answered 6 months ago

Hi, Sparklewonder,

  1. COI, happen when the company increase or reduce their inventory. For instance, the starting year inventory value is $100m and by the end of year, it become $200m. The increase is due to the management purchasing $100m worth of inventory. Hence the difference of $100m is recorded in the P&L as a gain of $100m. In real fact, those $100m is not actual gain from operating but rather increase in their inventory due to purchase. Hence, you have to subtract it from the profit. Theory is the same when the inventory is reduce where you add back the negative to the profit. Do let me know, if you understand what I just explained as it is slightly more technical.
     
  2. Profit/Equity attributed to shareholder of the company are basically shareholder money. Non-controlling interest is never the money of shareholder company. For instance, the company own a subsidiary for 90% stake while remaining 10% stake is own by other investors (minority interest). If the subsidiary make $100m in profit, $90m will be given to the shareholder of the company while the remaining $10m is given to the other investors (minority interest). Hence, that is the reason why we took profit attributed to shareholder as non-controlling interest (sometime called minority interest) is never your money.
     
  3. So sorry, I missed out on the improvement to investment property. Yes you can consider that as a capex but the figure is quite small and insignificant. As for investment in an associate, that is not a capex but rather just an investment.
     
  4. Once you have done with the excel, you can send it to me to double check your figure.

 

Victor Chng answered 6 months ago

Hi, Sparklewonder,
 
I had looked at your excel and stated those figures that are incorrect in yellow. The excel was sent back to you through email. 

sparklewonder answered 6 months ago

Hi Victor,
Thanks for your help. The ratios look more normalised now :)
For the no. of shares, I had looked through the annual report and noted that UMS Holdings had issued 1 bonus share for every 4 ordinary share held in year 2014 and 2017.
Whenever there is a share split, I have to adjust the number of shares for all the previous years?

  • So in year 2014 to year 2016, it would be 429.1*1.25=536.4 ?
  • Then for year 2011 to year 2013, I would have to take the base year 2011’s figure 343.8*1.25*1.25=537.2?

I saw that my number for year 2011-2013 is different from yours .. is my understanding flawed somewhere? 
In addition, just like to understand for share of profit from associate, if it is a singular event, only then I include it in numbers, otherwise I should just omit if it is recurring? 

Victor Chng answered 6 months ago

Hi Sparklewonder,
 
Your adjustment for the outstanding shares is correct. The difference is just 0.1 which may due to rounding error. Do note that, unless it is a significant difference, if not it is still ok. Keep up the good work :)

2011 & 2012 figure base on your number of shares you need to multiply 1.25 by twice as mentioned by you. The 2013 number of shares just need to multiply by once. 
 
Share of profit from associate is the company investment in a company that they owned less than 50% stake. Due to the fact that they own less than 50%, they only recorded profit. Hence, it is a actual business that the company own which is not a one-off item.

sparklewonder replied 6 months ago

Why is the figure in 2013 multiplied by only 1 time?

Victor Chng replied 6 months ago

Hi Sparklewonder,

Your excel input 2013 number of share is 429.1m which have multiply by 1.25 once already. Hence, this is the reason why I say just multiply by once.

If the take the original figure of 2013 number of shares is 343.8m then you have to multiply by 1.25 twice.