Inventory Turnover RatioThe inventory turnover ratio is used to tell if a company is keeping a good sized inventory based on their sales. It is considered to be a very important figure.(Cost of Goods Sold) / (Average time in inventory) Generally a higher inventory turnover is better. If is too low that could mean the company is overstocking or they are unable to sell their products at a decent rate. Either way it indicates the company is not being run properly and may not be a good investment. Even though it is better to have a high inventory turnover ratio it is possible to be too high. If it is too high, that could show a company is not keeping enough inventory to meet demand. This could equate to loss of sales. This ratio should be compared with other companies in the same industry group to determine if it is good or bad. You should also think creatively when using this ratio. If they have too much inventory in winter but the company makes most of its sales during spring and summer, they could simply be preparing by getting more inventory now. Most companies will probably appear to have a lot of stuff in storage before Christmas, Valentine’s Day, or other major holidays. If they do not stock up during these days they may miss a lot of sales to competitors during the busy season. Also remember that it is normally a good idea for a company to have at least some storage on the side at all times. This is because you never know if you are going to get more demand for a given product and you will need to be able to find it in the inventory or you will miss sales. Look at this indicator with an open mind. Other Financial Ratios Here are some other financial ratios to look into. |
