2.2 Asset Management
The asset management ratio is a measurement that shows how effectively a company is using
its owned resources to generate revenue or sales (Brush n.d.). To determine how many sales
were produced from each dollar of business assets, the ratio compares the gross revenue of
the company to the average total number of assets (Brush n.d.). The more assets are used
effectively by the business, the higher the asset ratio (Brush n.d.). Asset management ratios
include inventory turnover ratio (in times), inventory turnover days (in days), and day sales
outstanding (in days) (Ready Ratios n.d.).
Inventory Turnover Ratio =
The inventory turnover ratio is an efficiency ratio that analyses the effectiveness of inventory
management (CFI Team 2023). To determine how frequently inventory is "turned" or sold
over the course of a period, the inventory turnover ratio formula is equal to the cost of
products sold divided by total or average inventory (CFI Team 2023). The ratio can be used
to determine if there are excessive inventory levels compared to sales (CFI Team 2023).
2021
2022
Cost of goods sold = RM705587429 (Poh
Cost of goods sold = RM1094999492 (Poh
Kong Holdings Berhad 2022, p.105; Figure 2) Kong Holdings Berhad 2022, p.105; Figure 2)
Ending Inventories = RM594777574; Figure Ending Inventories = RM643905688 (Poh
1)
Kong Holdings Berhad 2022, p.103; Figure 1)
Inventory Turnover Ratio =
=
= 1.1863 times
Inventory Turnover Ratio = =
= 1.701 times
Analysing on inventory turnover ratio
In the year 2021, the firm has produced and sold inventories by 1.1863 times in a year while
in the year 2022, the firm has produced and sold inventories by 1.701 times in a year. Based
on the inventory turnover ratio that is calculated, the asset management of Poh Kong
Holdings Berhad has improved as the inventory turnover ratio has increased from 1.1863
times to 1.701 times. This means that the inventories in 2022 are easier to sell and the
company is not likely to carry obsolete stocks (Jenkins 2022). Furthermore, it also indicates
that the firm has a stronger sale and is depleting its stock at a rapid pace in 2022 (Jenkins
2022). Although according to the ratio, Poh Kong has a better performance in the year 2022
compared to 2021, it might also indicate that the inventory values have been written down or
the inventory is not being carried enough to keep up with the demand. However, improving
in the inventory turnover ratio does not necessarily indicate that POH KONG is performing
better than their competitors. In the year 2021, the Gross Domestic Product (GDP) in
Malaysia was worth 372.98 billion US dollars, according to official data from the World
Bank (Trading Economics n.d.; Figure 3). However, Malaysia's GDP has a growth of 8.7%
for 2022 and has also outperformed the 3.1% economic growth rate achieved in 2021
(Ministry of Finance Malaysia 2023). As a result, POH KONG's improved performance may
be due to an increase in consumer GDP rather than POH KONG being better than their
competitors, as their competitors may also be benefiting from an increase in GDP.
Reasons for choosing the inventory turnover ratio
The reason for choosing the inventory turnover ratio (in times) is that it is able to help
evaluate the firm’s efficiency (Accounting Guide n.d.). Investors can assess the company's
success using this tool (Accounting Guide n.d.). The company needs to minimize the
inventory level without any impact on sales (Accounting Guide n.d.). The second reason is
this ratio will help the firm to manage its inventory (Accounting Guide n.d.). Stocking too
much inventory will affect the operating capital of the business (Accounting Guide n.d.). The
business will be in danger from market price volatility and obsolescence (Accounting Guide
n.d.). However, having insufficient stock will affect sales and client wait times (Accounting
Guide n.d.). The third reason is this ratio can help the firm to manage its working capital
(Accounting Guide n.d.). The company must spend money on the acquisition and storage of
inventory in order to make a sale(Accounting Guide n.d.). If the inventory is the only thing
that remains in the warehouse, then the company's funds will also be trapped (Accounting
Guide n.d.). The money should be put to other uses that bring in money for the business
(Accounting Guide n.d.).
References
a.
CFI Team 2023, Inventory Turnover Ratio, CFI Team, viewed 1 April 2023,
<https://corporatefinanceinstitute.com/resources/accounting/inventory-turnoverratio/>
b.
Brush, K n.d., Asset Turnover Ratio, Tech Target, viewed 1 April 2023,
<https://www.techtarget.com/searchbusinessanalytics/definition/asset-turnover-ratio>
c. Ready Ratios n.d., Asset Management (turnover) ratios, Ready Ratios, viewed 1 April
2023, <https://www.readyratios.com/reference/asset/>
d.
Jenkins, A 2022, Inventory Turnover Ratio Defined: Formula, Tips, & Examples,
NetSuite,
viewed
1
April
2023,
<https://www.netsuite.com/portal/resource/articles/inventory-management/inventoryturnoverratio.shtml#:~:text=The%20inventory%20turnover%20ratio%20is,lower%20one%20t
o%20weak%20sales>]
e. Poh Kong Holdings Berhad 2022, Poh Kong Annual Report 2022, Chartnexus, viewed
1 April 2023, <https://ir2.chartnexus.com/pohkong/docs/ar/2022.pdf>
f.
Accounting Guide n.d., Advantages and Disadvantages of Inventory Turnover Ratio,
Accounting Guide, viewed 1 April 2023, <https://accountinguide.com/advantagesand-disadvantages-of-inventory-turnover-ratio/>
g.
Poh Kong Holdings Berhad 2022, Statements of Financial Position of Poh Kong
Holdings
Berhad,
Chartnexus,
viewed
1
April
2023,
<https://ir2.chartnexus.com/pohkong/docs/ar/2022.pdf>
h. Poh Kong Holdings Berhad 2022, Statements of Comprehensive Income, Chartnexus,
viewed 1 April 2023, <https://ir2.chartnexus.com/pohkong/docs/ar/2022.pdf>
new references
i.
Trading Economics n.d., Malaysia GDP, Trading Economics, viewed 5 April 2023,
<https://tradingeconomics.com/malaysia/gdp>
j. Ministry of Finance Malaysia 2023, Strong 8.7% GDP growth for 2022 shows restored
confidence in national economy: Anwar, Official Portal of Ministry of Finance
Malaysia, viewed 5 April 2023, <https://www.mof.gov.my/portal/en/news/presscitations/strong-8-7-gdp-growth-for-2022-shows-restored-confidence-in-nationaleconomy-anwar>
Appendices
Figure 1 Statements of Financial Position of Poh Kong Holdings Berhad
Source: Chartnexus
Figure 2 Statements of Comprehensive Income
Source: Chartnexus
Figure 3 Malaysia GDP
Source: Trading Economics