Yoong Onn Corporation Berhad(Yocb) has released its quarter result ended 31st December 2013. The revenue is quite flattish but profit before tax was up around 29% compare to last year corresponding quarter. If we compare to immediate preceding quarter, revenue was up 9% and profit before tax was up 37.9%, quite a strong result achieved due to the festive season. Despite the good result, the inventories and receivables in the balance sheet are increasing. If you read my previous post on YOCB, this is the problem that i am worry about.
As you can see
Quarter result ended 30th September 2013
Quarter result ended 31st December 2013
Since FY2009 until now, the inventories and receivable are growing non-stop.
I have done some calculations to analyse the company's working capital efficiency from FY 2010 to FY 2013.
In FY2013, it takes the company roughly 196 days, or 6.5 months in order to clear off all the inventories(roughly 157 days in FY2010) . As you can see, the inventory turnover ratio has became lower and lower year on year. If you take a look on YOCB 2013 annual report, you will find out that most of the inventory held are finished products. I deemed this a bad signal as products will deteriorate. When the inventories piled up too much, it takes up more spaces in the warehouses and incur unnecessary storage cost too.
As you can see, it takes the company roughly 65 days to collect back the debts. Please be extra careful when the rate of increase in receivable is greater than the sales growth. When a company has its receivable outgrows its revenue, it might signify that a company is trying to boost up its revenue by selling more goods on credit. It is one of the famous financial shenanigans where a company trying to cheat the investors so that investors believe the company business has turnaround. In YOCB case, i believe the company is doing good and with its strong balance sheet and brand name , there is no reason that it will involve in this financial shenanigan.
I am not worry on payable side. Shorten of payable period is a good sign where the company ability to pay off the debts increase, however, lengthen of payable days could signify that the company has better control of their money by delaying their payment while at the same time bring no adverse effect on their credit reputation.
Cash Conversion Cycle (CCC)
As you can see, it is a clear uptrend on its cash conversion days. It takes around 229 days for YOCB to convert the inventories to sales and collect back the receivables, from around 171 days in FY 2010. The rate of increasing is surprisingly high for me.
It is understandable that the company is trying to grow the business but still I am very much concern of the non-stop growing of receivables and inventories. I have tried to compare the working capital between YOCB and Padini and found out that Padini is way more efficient that YOCB's. I believe that is because Padini generated most of its revenue through its own outlet while YOCB is more dependent on consignment sales. YOCB should try to increase their working capital efficiency as inventories and receivables cannot be growing forever. At the time i am writing, the share price went up 7 cents to close at 1.22, or market cap of around 200M (11/03/2014) which is the all time high.