Financial ratios in energy projects: The case of days sales of inventory

Article history: Received: June18, 2020 Received in revised format: August 3 2020 Accepted: September 8, 2020 Available online: September 10, 2020 The aim of this study is to explore the Days sales of inventory (DSI) as an indicator for inventory management among energy companies in Saudi Arabia for the period ranging from 2012 to 2019. The results of this study indicate that Aldrees company is ranked the first in terms of managing its inventory in which the average value of the DSI for the period 2013-2019 was 5 days. The second rank in terms of the DSI value for the period 2012-2019 belongs to Bahri company in which the average DSI was 23 days. While the third rank was Petro Rabigh in which the DSI average was 31 days. The results of this study should be useful to policy makers at the company management and other external stakeholders such as investors, auditors and lenders. © 2021 by the authors; licensee Growing Science, Canada


Introduction
Supply chain management (SCM) consists of processes such as inventory management. In definition, SCM is the management of all the activities linked to the transfer of products from raw materials to the end-user. It is associated with the choice of resources and supplies, storage, customer service, product scheduling, transfer, inventory management, and order processing (Burgess et al., 2006). Four methods can be used to increase the value of any business unit. They include reduction of circulating capital, revenue increase, increased productivity, and reduced operating costs. For example, an innovation to decrease inventory level can result in the loss of sales level; besides, it is easy to measure the benefits of this innovation. Even so, to achieve long-term growth, there should be an increase in revenue and the managers have to focus on all the four techniques to increase the firm's value (Lambert et al., 2005). Besides, supply chain management (SCM) in cost accounting is regarded as the management tool to improve order, inventory process, and manufacturing. Also, CAS plays a fundamental role in sustaining the supply chain management system (Marota et al., 2017). Inventory management is considered a part of cash management (CIMA, 2002). According to Jarrad (2000), Baumol managed the problem of cash management in 1952 as an inventory management problem whereby he applied methods for optimizing inventory to the drawback of covering cash demands. From the study, it is evident that cash management is a fundamental feature of management function, and its role cannot be overstressed. When organizations understand the concept of efficient cash management and implement it, the success of the business will be realized. Nevertheless, bad or inadequacy of cash management may result in losing cash discount as well as the reputation of the company because of insolvency and non-payment or commitment on due dates; this may lead to shut down of the firm's operations (Abioro, 2013;Tuller, 2008). According to Gallagher (2002), the enactment of a good cash management system will make sure that there is an increase in profits and opportunities, strengthen the balance sheet of the firm, improve the company's confidence, enhance operational efficiency and ensure better control of financial risk.
Days sales of inventory (DSI) is one of the most fundamental measurements of inventory management. DSI is also described as days' sales of inventory, exhibits the average number of days an organization turns its inventory into sales. Besides, DSI value differs from industry and company. If a company's DSI is low, it signifies two things, that is, the organization has been effectively using its inventory, and the firm has not been storing inventory for the needed request or the organization has been jotting down the inventory's values. Generally, a decline in DSI is an enhancement to working capital, while an increase in DSI signifies deterioration. On the contrary, a high DSI signifies two things: first, the organization has not been able to translate its inventory into sales quickly, and second, the company has not been keeping outdated inventory. Monitoring DSI is associated with various benefits, including (1) Optimization of inventory management -the decisions concerning inventory purchases are made based on how well an organization is tracking its benchmark.
(2) Improvement of cash flow -the identification of techniques to lower DSI helps to free up cash, which creates opportunities to invest in other business areas.
(3) Exhibit a need for new decisions associated with marketing and pricing -if DSI is higher than preferred, an individual might opt to introduce product bundles, discounts, or other incentives to motivate consumers to purchase more frequently. (4) Reduction of spoilage risk -it is essential to maintain a low DSI if there are seasonal items or perishable goods because longer stay on the shelves increases the chances of inventory dead stock or spoilage. (5) Planning for the future -understanding the fluctuation of DSI over the course of the year because of troughs and seasonal sales can help in the creation of an accurate inventory forecast for the future of a business. (Tradecko, 2020).
The remainder of the paper proceeds as follows. The next section briefly discusses the methodology. The third section highlights the findings of the study. And, the final section discusses the conclusion and implication.

Sample selection and data collection
The sample of this study consists of energy listed companies on Saudi Stock Exchange (Tadawul) for the years ranging from 2013 to 2019. We conduct a cross-sectional review of financial reports of the sample 21

Source of Data and Analysis
This study used secondary data which are collected from the annual reports of the energy companies and the scholarly published papers in the topic of inventory management and supply chain management. Regarding the data analysis, this study used descriptive statistics to analyze the data collected such as frequency and percentage. Table 1 depicts the inventory in the beginning and ending periods as well as the average inventory and cost of goods sold for Rabigh Refining and Petrochemical Company, Aldrees Petroleum & Transport Services Co., and The National Shipping Company of Saudi Arabia for a 7-year period for each company.  2013  223023000  132068000  177545500  2421363000  2014  327490000  223023000  275256500  3170122000  2015  203610000  327490000  265550000  5485511000  2016  240675000  203610000  222142500  4983302000  2017  290759000  240675000  265717000  4911018000  2018  344045000  290759000  317402000  5183278000  2019  411255000  344045000  377650000  5374186000   Table 2 and Fig. 1 show the Days sales of inventory (DSI) for the three companies over a period of 7 years for each company.  As shown by Table 2  This indicates that the increase in the DSI value for Aldrees company during this period as a comparison between the highest and lowest values of DSI was 20%. In terms of Bahri company, the highest DSI value reported during the period ranging from 2013 to 2019 was 32 days in 2014. And, the lowest DSI value reported during this period was 16 days in 2016. This indicates that the increase in the DSI value during this period of time between the highest and lowest values of DSI was 50%. In general, when the average DSI value is calculated for the 7-year period, it turns out that the lowest DSI value was achieved by Aldrees (5 days), Bahri (23 days), and then Petro Rabigh (31 days) as shown by the following Table 3 and Fig. 2. As shown by Table 3 and Fig. 2 the lowest mean of days' inventory outstanding DSI was 5 days which was reported by Aldrees company for the considered period 2013-2019. Aldrees's DSI mean is far lower than those of Petro Rabigh 31 days and Bahri (23 days). The DSI mean of Aldrees is lower than Petro Rabigh by 5.2 times (84%) and it is lower than Bahri by 4.6 times (78%). This result indicates that Aldrees company is ranked as the first in terms of inventory management followed by Bahri company as the second rank and then Petro Rabigh is ranked the third. This result refers to the fact that Aldrees company is able to more quickly turn its inventory into sales than Petro Rabigh and Bahri. Therefore, Aldrees company has an efficient strategy in managing its inventory better than Petro Rabigh and Bahri. This result also indicates that Petro Rabigh and Bahri companies are not able to quickly turn their inventory into sales as they are compared with Aldrees. This can be due to poor sales performance or the storing problems. Having too much idle inventory is detrimental to a company as inventory may eventually become obsolete and unsellable. Holding excess inventory also negatively impacts cash flow.

Conclusion and implication
This research aims at exploring an essential mensuration of inventory management, that is, Days sales of inventory (DSI). Days sales of inventory (DSI), illustrate the average number of days an organization turns its inventory into sales. The sample of this research comprises organizations in the energy industry, including Bahri and Petro Rabigh Aldrees, for the duration ranging from 2013 to 2019. From the results, descriptive statistics have been used to exhibit that Aldrees is classified as the first company in regards to inventory management, whereby the average DSI value for the period 2013-2019 was five days. In terms of DSI value, Bahri company was ranked second for the period 2012-2019, whereby the average DSI was 23 days. Petro Rabigh was ranked third, with an average DSI value of 31 days.
This research proposes that Bahri and Petro Rabigh firms should enhance their values of DSI by raising sales with better marketing techniques without having to increase the inventory investment, using techniques such as negotiations with the vendor, group and bulk purchases to reduce the input prices, explicit forecasting and planning for their inventories, competitive pricing with the goods, Executing Pareto's 80:20 Principle on the inventory to invest in a better inventory resulting in maximum profits, curb dead and safety inventory using effective forecasting and planning, use of techniques such as EOQ to optimize the level of stock, focusing on the establishment of the advance book to ensure the planning of inventory becomes more efficient, and working on firm's product mix as well as determining the top-selling products (Efinancemanagement, 2020).
There are various notable limitations that the study encountered. One of the limitations was that the number of years and companies undertaken in this study. Future studies should consider a longer time of years and other industries.