the effect of inventory turnover ratio on profitability of consumergoods companies in vietnam

The objective of this research is to analyze the effect of Inventory Turnover on Return on Assets.. The research results show that Inventory Turnover affects Return on Assets.. Inventory

BỘ GIÁO DỤC VÀ ĐÀO TẠO

TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG

-o0o -EMPIRICAL ANALYSIS

Topic: The effect of inventory turnover ratio on profitability of consumer

goods companies in Vietnam Lecturer: Prof Nguyễn Thu Hằng Class code: TCHE442

Hồ Chí Minh city, November 2022

Chapter 1: INTRODUCTION

1.1 Background

1.2 Problem statement

1.3 Research objective

1.4 Research question

Chapter 2: LITERATURE REVIEW

Chapter 3: MODEL AND METHODOLOGY

3.1 Regression model

3.2 Variables definition

3.3 Methodology

Chapter 4: RESULTS

Chapter 5: CONCLUSION

5.1 Inference of research

5.2 Limitation

REFERENCES

Chapter 1 INTRODUCTION

Abstract

Profitability has an important role in the company The profitability ratio that is often used is Return on Assets (ROA) The management of inventory of the company must be effective, it can be seen from its inventory turnover The objective of this research is to analyze the effect of Inventory Turnover on Return

on Assets This research used a sample of Consumer goods companies in the Vietnamese Stock Exchange

in 2018 The hypothesis testing in this research was done using multiple regression techniques at a significance level of 1% The research results show that Inventory Turnover affects Return on Assets

1.1.Background

In the current massive active business environment, profit is one of the primary purposes of every company entity's formation (Wiranata & Nugrahanti, 2013; Ahmad et al., 2018; Hala, 2020; Mira, 2020; Anwar & Gunawan, 2020; Amran et al., 2021) Without profit, the corporation cannot meet its other aims, which include continuing operations and corporate social responsibility

Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a given period On average, inventory represents 35% of total assets and 50% of current assets for retailers (Yasin, Gao & Gaur, 2013) Because such a significant fraction of the assets are invested in inventory, retailers pay close attention to inventory productivity in order to optimize profitability

To get maximum profit, enhancing inventory sales to increase inventory turnover is a common business practice used by corporations A high inventory turnover ratio means the corporation sells its goods more quickly, increasing operational profit and, eventually, net income (Nasution, Abdillah Arif, 2020) Thus the level of profitability plays an indispensable role and rapid inventory turnover is expected to increase the profitability of the company The profitability can be proxied by return on assets (ROA) (Amanda, 2019)

The study's goal is to examine pre-existing assumptions regarding inventory turnover and its impact on consumer good business profitability in Vietnam The study is divided into five sections The first section constitutes an introduction, the second section includes literature review, the third describes the Methodology and Data, the fourth presents the result and the fifth section incorporates the conclusion, inference, and limitations of the current study

1.2.Problem statement

Despite the importance of inventory management in general when it comes to the consumer goods industry, this outstanding field witnessed a lack of empirical studies on these topics Shortage of such information has emerged as one of the significant obstacles in order to measure their performance as well

as profitability, admitted by numerous Vietnamese companies (Phuong, 2013) Thus the relationship between inventory management and the profitability of consumer goods companies in Vietnam do not produce enough insightful data

Recognizing this, our group sought to approach the problem and focused on researching the impact of inventory turnover on the profitability of consumer goods companies in Vietnam to find whether the assumption is true for consumer goods companies in Vietnam

1.3.Research objective

The objective of this study is to support companies in the consumer goods industry in gaining more specific data to maximize profit from viable proposed approaches The topic focuses on clarifying the impact of inventory turnover on profitability performance in terms of the proposed research methodology Additionally, while the effectiveness of working capital would be composed of some ratios which were taken as dependent variables i.e., Inventory turnover ratio, Sales growth ratio, and Net Working Capital (Umar Farooq, 2019); ROA would be used to represent profitability performance

In order to assess the level of relationship between these mentioned dependent components and ROA,

three hypotheses were developed Data has been extracted from financial statement analysis that is

available on the website of CafeF (2018)

1.4.Research question

This study seeks to answer the following research questions:

- Is the impact of inventory management on a firm’s profitability statistically significant

- Does a firm’s inventory management positively affect its profitability

Chapter 2 LITERATURE REVIEW

What is inventory?

According to Rangkuti (2004), inventory is an asset which includes goods owned by the company with the intention of being sold within a certain business period or inventory of goods that are still in progress or in the production process, or inventory of raw materials awaiting their use in a production process Too much inventory consumes physical space, creates a financial burden, and increases the possibility of damage, spoilage and loss Further, excessive inventory frequently compensates for sloppy and inefficient management, poor forecasting, haphazard scheduling, and inadequate attention to process and procedures (Dimitrios P Koumanakos (2008) Therefore, inventory control is of special importance for retailers, particularly for perishable items concerning their finite lifetimes (Chiu, 1999)

What inventory turnover indicates?

The higher level of inventory turnover causes the company to be faster in selling merchandise so that it will increase operating profit and ultimately will increase net income (Nasution, A A 2020) According to

Bhunia A (2010), low inventory turnover ratio indicates that management does not properly manage inventory To exemplify, in industrial companies, problems often arise in managing working capital, a driving force for poor management, such as slow inventory turnover Even though many factors cause it,

an inventory turnover that is too slow or a small value can indicate that product management and other related components are not in the best condition

How inventory turnover is measured?

Inventory turnover can also be measured to control the company's finances and show how many times the funds embedded in the inventory rotate in a certain period (Nuraini, A I 2021) Inventory Turnover is the ratio between the cost of goods sold to the average inventory, showing how quickly the inventory can be sold Average inventory can be calculated using numbers and monthly, or yearly (Nasution, A A 2020.) What is Profitability?

Nasution, Abdillah Arif argues profitability is the relationship between revenues and costs generated by using the firm’s asset both current and fixed assets, in productive activities Profitability shows how the company's ability to use all of its resources to generate profits for a certain period New efficiency can be known if the profit is compared to the wealth or investment used to generate the profit The profitability ratio that is often used is Return on Assets (ROA) (Afrianah, E S (2016)

Given the information above, it can be said that Return On Assets (ROA) is a ratio used to calculate how much a firm's profit (net income) is earned from all of the assets that the company has in relation to the investment made The greater this ratio, the better the company's earnings as well as how well the corporation manages its assets for the rate of return on investment Sukamulja (2017) states that the following is the formula for calculating Return on Assets (ROA):

Gaps of study:

Research from Septiady et al (2019) states that the results of the inventory turnover research have a significant effect on Return On Assets (ROA) and cash turnover has a significant effect on Return On Assets (ROA) simultaneously and partially Then according to Afrianah (2016), simultaneous and partial inventory turnover has a significant effect on ROA This is also supported by the results of research Hek

& Bengawan (2018), which states that partially, cash turnover and inventory turnover variables have a significant effect on Return On Assets (ROA)

On the other side of the coin, according to Lestari et al (2017) Inventory Turnover partially has no significant effect on ROA This is also supported by the results of research from (Amin (2015) which states that cash turnover and inventory turnover have no significant effect on Return On Assets (ROA) Statements above infer that numerous findings from various studies indicate that inventory turnover has

no appreciable impact on return on assets, while other research states the opposite In context, this study's objective is to investigate existing theories on inventory turnover and how it affects Vietnam's consumer goods industry's profitability

Chapter 3 MODEL AND METHODOLOGY

3.1.Regression model

ROA = β0 + β1 Inventory turnover + β2 Networking Capital + 3 Sale Growth + β β4 Size + β5 Leverage + β6 Liquidity

3.2.Variables definition

ROA

Profitability is important as it is the primary goal of any for-profit business, without profit companies won’t be able to sustain very long This is why it is important to measure and estimate elements that affect profitability Because the profitability ratio measures a company's ability to earn profits from all of its existing capabilities and sources, including sales activities, cash, capital, employee count, and branch count (Permana, 2017), in this research we will use ROA as a proxy for a firm's profitability Return on assets is used to see the extent to which the investment that has been invested is able to provide a return on profits following what is expected based on assets owned (Brigham and Houston, 2010), the higher the ROA, the higher the better the firm’s performance

Inventory Turnover Ratio

Inventory turnover is used to show how many times the inventory can rotate in a year (Demeter & Matyusz, 2011), it is the rate that inventory stock is sold, or used, and replaced The inventory turnover ratio is calculated by dividing the cost of goods by average inventory for the same period Firms with high inventory turnover means that inventory is quickly sold and the company is considered efficient in managing inventory The higher the level of inventory turnover, the higher the profits obtained

(Syamsuddin 2002)

Networking Capital

Networking capital is the amount of funds left in the organization after subtracting current liabilities from current assets It has been documented that Networking capital has a positive impact on a firm's profitability, that is higher networking capital leads to higher profits Higher NWC may help improve the performance of firms because it can stimulate sales (Baños-Caballero et al., 2010) and prevent production interruptions (Blinder and Maccini, 1991)

Growth rate

Sale growth refers to the extent to which Sale changed over a designated period of time The sale growth may reflect how quickly or how much a firm’s sale changes over time, it is calculated by dividing the difference between the current period sale and the previous period sale with the previous period sale Leverage

The leverage ratio or also known as the solvency ratio is used to measure the extent of the company’s assets that are financed by debt (Kasmir, 2014) This ratio measures how much the company’s assets are financed by creditors According to Kouser et al (2011), leverage ratio has a positive and significant influence on the profitability of a company Mahfoudh (2013), and Mulyana (2018) also proved that leverage positively affects the return on assets using the regression analysis However, research done by Akinlo (2012) showed that leverage has a negative effect on profitability

Liquidity

Liquidity is a company's ability to convert assets to cash or acquire cash to pay its short-term obligations

or liabilities, it is not only concerned with the overall financing of the company but also relates to the ability to convert current assets into cash It is suspected that better liquidity management of a firm will improve its performance (ROA) Kyule (2015) found that liquidity could influence the profitability of

firms in Kenya; and Karani (2014) indicated that there is a positive relationship between profitability and liquidity management of commercial banks in Kenya

3.3.Methodology

The study has collected financial data on [number] Consumer goods companies listed on 4 stock exchanges: Hose, HNX, Upcom and OTC in the period of 2018 by the documentation method The data collected is secondary from 2 sources: fiinpro’s non-financial firms’ dataset and data found on the financial portal stockbiz, all of the data used is quantitative In this research, Stata will be the primary data analysis tool and the analysis methods used are classical assumption test, multiple regression analysis test and hypothesis testing The hypothesis testing will include 3 main tests: Test of the coefficient of determination (R square), Partial test (t-test) and Simultaneous test (Test F)

Chapter 4 RESULTS

Case 1: ROA - Inv

Table Robust Regression 1

ROA Coef Std Err t P> |t| [95% Conf Interval]

Inv 0003012

0005421

1.84 0.56 -.0007664 0013688

SG 0000665

0001503 0.44 0.659 -.0002296 .0003625

NC 2.24e-14 7.55e-15 2.97 0.003 7.54e-15 3.73e-14

SIZE 0093296

0061346 1.52 0.130 -.0027519 .021411 LEV -.0012414

0010546

-1.18 0.240 -.0033183 0008355 LIQ 001425

0024094

0.59 0.555 -.00332 0061701 _cons -.0676335

0721392

-0.94 0.349 -.2097034 0744363 The t-value of inventory turnover is 0.56 → ROA is not dependent on inventory turnover ratio → Inventory of a company does not have sufficient effect to be the reason for change in its profitability The t-stats value of Sale Growth is 0.44 → Sale Growth does not have significant impact on ROA The t-stats value of Networking Capital is 2.97 which indicates that ROA is strongly dependent on Networking Capital at the significant level of 1% A company which has more current assets relative to its current liability makes more profit than others

Firm size has a t-value of 1.52, Leverage ratio -1.18 and Liquidity ratio 0.59 which presents that ROA is not dependent on those variables at the significant level of 1%

Table Multicollinearity Test 1

Variable VIF 1/VIF

Mean VIF 1.07

The variance inflation factor (VIF) value for the firm size variable is 1.19; the liquidity is 1.07, the inventory turnover and the leverage variables are 1.05, the networking capital is 1.04 and the sale growth

is 1.00, which means that the value is less than 10

The multicollinearity test results showed that the variables did not show multicollinearity

Case 2: ROA - LInv

Table Robust Regression 2

ROA Coef Std Err t P> |t| [95% Conf Interval]

LInv 0129119

0057965

2.23 0.027 0014963 0243274

SG 0000711 000149 0.48 0.633 -.0002223 0003645

NC 2.04e-14 7.54e-15 2.71 0.007 5.56e-15 3.53e-14

0066086 LEV -.0011428

0010452

-1.09 0.275 -.0032011 0009155 LIQ 0015507

0023878

0.65 0.517 -.0031518 0062532 _cons -.1173959

0744297

-1.58 0.116 -.2639767 0291848

The t-value of logarithm of inventory turnover is 2.23 → ROA is strongly dependent on inventory turnover ratio at the significant level of 5% → Companies that enjoy a high volume of inventory turnover have the capacity to earn more profit Each additional percentage of inventory will increase ROA 0.0129 times

The t-stats value of Sale Growth is 0.48 → Sale Growth does not have significant impact on ROA The t-stats value of Networking Capital and Firm Size respectively are 2.71 and 2.28 which proves that ROA is strongly dependent on Networking Capital and Firm Size A company which has more current assets relative to its current liability and larger size makes more profit than others

Leverage and Liquidity ratio have t-value of -1.09 and 0.65, Leverage ratio -1.18 and Liquidity ratio 0.59 which presents that ROA is not dependent on those variables

Table Multicollinearity Test 2

Variable VIF 1/VIF

Mean VIF 1.14

The variance inflation factor (VIF) value for the firm size variable is 1.41; the logarithm of inventory turnover is 1.25, the liquidity is 1.07, the networking capital is 1.06, the leverage variables are 1.05, and the sale growth is 1.00, which means that the value is less than 10

The multicollinearity test results showed that the variables did not show multicollinearity

Case 3: LROA - Inv

Table Robust Regression 3

LRO

A Coef. Std Err t P> |t| [95% Conf Interval]

Inv 0031416 0042848 0.73 0.464 -.0053036 0115867

SG 0008157 0011852 0.69 0.492 -.0015202 0031516

NC 1.87e-13 6.25e-14 2.99 0.003 6.35e-14 3.10e-13

SIZE 1026685 0500999 2.05 0.042 0039239 2014132

LEV -.2366237 0564329 -4.19 0.000 -.3478504 -.1253969

LIQ 0012046 0223262 0.05 0.957 -.0427993 0452085

_cons -3.98507 5893619 -6.76 0.000 -5.146677 -2.823464

The t-value of inventory turnover is 0.73 → The logarithm of ROA is not dependent on inventory turnover ratio → Inventory of a company does not have sufficient effect to be the reason for change in its volume

of profitability

The t-stats value of Sale Growth is 0.69 → Sale Growth does not have significant impact on ROA