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A while ago we published a report on the financial health of South African companies. Today we look more closely at one of the variables that must have South African firms very worried. The growth in the size of inventories.
Growing inventories can signal one of two things. One, that firms are stocking up because they are expecting a bumper period and want to ensure they have enough supplies. Two, demand for companies' goods are falling and they are struggling to get rid of the stock they do hold in inventories. |
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The graphic to the right shows the closing value of inventories of various companie sizes for each quarter, starting with third quarter ending September 2013 and ending with fourth quarter ending 2015.
What is concerning to see is the sharp increase in the total closing value of inventories from December 2014 to December 2015. In December 2014 the total closing value of inventories amounted to R660,3billion. This amount ballooned to R780billion by December 2015, this shows an increase of 18,12% over the last 12 months (four quarters). For small companies, their closing value of inventories from December 2014 to December 2015 increased from R96,3billion to R152.2billion (reflecting a 57% increase in the level of inventories of small companies). Perhaps its time for small companies to lower their net profit margins to move their stock more easily (as shown in on our financial well being page, small companies earned the highest net profit margin). For medium companies, their closing value of inventories from December 2014 to December 2015 increased from R73,9billion to R78billion (reflecting a 5.5% increase in the level of inventories of medium companies). For large companies, their closing value of inventories from December 2014 to December 2015 increased from R490billion to R549.8billion (reflecting a 12.2% increase in the level of inventories of large companies). |
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Based on sluggish economic growth, increasing interest rates, slowing consumer spending, company inventories building up, it's not going to be a very good year for South African companies, and we expect operating and net profit margins to come under severe pressure this year as firms cut prices in order for them to try and get rid of slow moving stock.