Stocking up on Tat Seng Packaging and its inventory

I am now a tiny “business owner” of carton boxes.

My new love!

I did not find much information about Tat Seng Packaging on the WWW, except for its most recent annual report released for FY2016. Even its Investor Relations website has only been last updated in 2015. But I wasn’t worried, because their business model is very straight forward and simple to understand – they produce all types of cardboard/corrugated boxes.

I mentioned the three reasons why I bought the company’s shares and I quote it here again.

Strong balance sheets, very little debt and decent dividend yield

I wouldn’t go too much in depth into fundamental analysis since you can do the calculations yourself and with the information from SGX’s website and their annual reports.

I would, however, like to comment on something else that I have learnt recently. I will do a simple analysis of how liquid inventory is in Tat Seng Packaging and how we can use it and other ratios to access the health of cash flow within the company.

If you are a frequent user of the SGX website, the above image would probably look familiar to you. As you can see with the circled ratios in red, those are the three ratios that I wanted to highlight in this post.

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Average Days Inventory

It takes Tat Seng Packaging slightly over a month to clear their inventory. This shows that their stock is moving relatively quickly and a sign to show that business is ongoing. Too long would mean that sales is low while too short would also mean that they have trouble keeping up with orders. I’m satisfied with this number for now.

Average Days Payable

Shows how fast they are able to pay up their suppliers or vendors. On first glance, it takes them more than 3 months to clear off their liabilities. Now, this may seem long but comparing the numbers up to 2013, it has been reflected that it is quite normal for them since the numbers are pretty much stagnant. If I were to point fingers, I would probably blame it on their processing time and procurement procedure. Thus, this ratio would also be affected by the next ratio, Average Cash Conversion, in general.

Additionally, being able to delay payment would mean that they can have free cash flow on hand for a longer period of time. However, this does not make their liable payments disappear magically as well, so it’s just a good-to-know.

Average Cash Conversion

This last ratio shows how fast activities are turned into cash in the company. To put it simply, the entire process from inventory into sales, and then sales into cash. So if Average Days Payable is more than Average Cash Conversion, it means that the company is able to get paid in cash first for their products before paying off their liabilities, which would be a good sign of liquidity because they do not have to use their cash on hand.

I have also noticed that Tat Seng Packaging’s Average Cash Conversion has been reduced by roughly 2 weeks in 2017, and that brings good news because now, they would have a longer holding period for the cash before having to pay their vendors.

If you’re looking for a company with Average Days Payable < Average Cash Conversion, check out their competitor, New Toyo (N08).

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Although these ratios do not necessarily affect the true valuation of a company, but we can use it as a gauge to get a glimpse of how things (and cash, especially) move internally in the business. Use this in combination with other liquidity ratios like the Current and Quick ratios for a more all-rounded story. I’ll definitely be keeping this in mind when cherry picking other stocks in future.

Hope it was useful to you too!

Thanks for reading!

Miss Niao xoxo