EFFICIENCY ANALYSIS

INVENTORY TURNOVER RATIO

Ratio Analysis Group’s Ratio Industry Average Results

Inventory Turnover 3.17 9.24 Bad
Ratio
Explanation :

From above calculation, the group has lower inventory turnover ratio than industry
average. According to www.investing.com. Industry average is having a ratio of 9.24 times as
compared to Group of 3.17. The group sold and replace the inventory for 3.17 times.
Company took 114 days to convert inventory to sales. It is also equivalent to (12
months/3.17) which is 3.79 months.

Possible causes :

Caely Holdings Bhd have a low turnover because it may have a poor sale and other
excess inventory. This will cause the product tend to deteriorate and the product to defects as
they kept in warehouse. Lower inventory turnover results in lower sales. The sales of the
company may be low beacause of lack of sales promotion. The company may not advertise
their products well. It could also be because the company does not provide trade discounts to
encourage bulk purchases.

Recommendation to improve :

Based on the possible causes of low inventory turnover cited, the company may take the
following actions to improve it. The company should increase their sales promotion so that
they can attract more customer to buy their product. They can also advertise their product
through social media as people nowadays spend most of their time using their smartphones.
The company may also need to cut down on slow-moving and obsolete inventory by having
inventory clearance sales, that is, by selling these goods at a reduced price.
AVERAGE COLLECTION PERIOD

Ratio Analysis Group’s Ratio Industry Average Results

Average collection 3.43 6.77 Good
period
Explanation :

Caely Holdings BHD have a lower average collection period than the industry average which
is a good result because the lower the average collection period, the faster the debtors paying
their accounts. Therefore, the more efficient the company is in debtors collection. A lower
ratio may also indicate that this company is operating more on a cash basis. Other than that, a
high ratio is a sign that the company is having problems being paid for services rendered or
products sold.

Recommendation to maintain :

To maintain average collection period, there are several things the company should do. It
includes reducing collection time, increasing payment time and concentration of cash. By
reducing collection time, this will reduce customer collection that float time which in turn
will shorten the average collection period and the cash conversion cycle. Furthermore, by
increasing payment time, Caely Holdings BHD may benefit if the mail float, processing float
and clearing float for disbursements are increased. This approach should be used carefully as
longer payment periods may cause a strain in relationship with suppliers. Lastly,
concentration of cash used by the firm to concentrate lockbox and other deposits into one
bank. The advantage of doing this is that it ceates a large pool of funds for short-term
investments which will reduce transaction costs, since it comes from one pool.
NON-CURRENT ASSET TURNOVER

Ratio Analysis Group’s Ratio Industry Average Results

Non-current asset 3.25 1.3 Good
turnover
Explanation :

This ratio measures the company’s efficiency in utilizing its property, plant and equipment in
generating sales. Higher ratio is always more favourable, thus this company’s result show
that The Caely Holdings BHD is using its assets more efficiently. For instance, a ratio of 3
means that the net sales of the company equals to total net non-current assets for the year. In
other words, the company is generating RM3 of sales for every ringgit Malaysia invested in
assets. The amount of inventory for these company increasing from RM15,107 on 2017 to
RM25,898 on 2018. This is because there is increasing in operating supplies that lead to
increasing of finished goods.

Recommendation to maintain :

There are several techniques of inventory management available to firms. Firstly, the
Economic Order Quantity (EOQ) model will determine the optimal order size for an
inventory item after taking to account its expected usage and ordering and storage costs, so
that total inventory costs are minimized. Other than EOQ model, The firm can use Just-In-
Time system.This is a system which minimizes investment in inventory. Materials are
ordered in such a way that they arrive just in time when they are needed for production.
Lastly, The Caely Holdings BHD can use Materials Requirement Planning (MRP) to
maintain a good non-current asset turnover. This system will determine the type of materials
to order and when to order the. EOQ principles are used to determine the amount to be
ordered. A simulation is carried out to determine each product’s bill of materials, inventory
status and manufacturing process.
TOTAL ASSET TURNOVER

Ratio Analysis Group’s Ratio Industry Average Results

Total asset turnover 0.69 1.43 Bad
Explanation :

The ratio indicates that The Caely Holdings BHD is generating a lower volume of sales with
the given amount of assets as compared with the industry. A lower ratio than the industry’s
may indicate that a company should increase its sales, or some assets may need to be
disposed of.

Possible causes :

The Caely Holdings BHD’s sales of the company is decreasing from RM119130 on 2017 to
RM97946 on 2018. This may cause the lower ratio of the total asset turnover because it
indicates the inefficient use of asset to produce sales that the result of the sales is dropping. It
may also be result of too much investment in non-current asset and current asset but the main
problem of lower TAT is low sales.

Recommendation to improve :

The Caely Holdings BHD need to increase its production, so that the asset can be use
more efficiently. Disposal of idle non-current assets need to be done if the company can not
increase its production due to to certain factors.