Earnings Power in Personal Finance
The United States of America is full of people who have huge student loan debt, credit card debt, and mortgage debt. There are many reasons which can be attributed to this massive increase in personal debt. However, the inability to completely understand and apply the concept of earnings power is also an important reason which […]
Pre-IPO Investing
An initial public offer (IPO) is a method of selling securities wherein the entire lot of securities is offered for sale to the general public. An IPO is often used by companies when they want to sell their securities to smaller investment organizations and even retail investors. In the past few years, IPOs have seen […]
Yield To Maturity (YTM)
Yield to maturity is a fundamental concept which every bond investor must be aware of. The term yield to maturity might sound complex and intimidating. However, in reality, the concept is quite simple. In this article, we will have a closer look at what yield to maturity is as well as the manner in which […]
Retail Banking : Demand Deposit Products
Deposits can be divided into two types. The first type is time deposits in which an account holder gives the bank money for a fixed period of time and therefore does not have any right to ask for money before the maturity date has been reached. On the other hand, there are certain types of […]
Digital Onboarding in Commercial Banking
Commercial banking has traditionally been slow to adopt the latest technology. However, over the past few years, commercial banks have undergone so much transformation that they have now started using different technologies to complete different steps of the same process. In order to foster automation and better adoption of technology, it is important to view […]
A company is said to be more efficient when it keeps the least inventory on hand to make the sales it does. The systems of the company must be so efficient that goods are available for sale as and when required and spend the least amount of time waiting in a warehouse. This is because inventory has many costs associated with it. Until earlier it was known as the necessary evil. Not only is capital locked in inventory creating an opportunity cost, there are other costs involved like warehousing, security, insurance, pilferage and so on.
The idea that inventory should be minimized if not eliminated caught the fancy of management gurus from 1980’s onwards. Japanese companies showed how they could produce efficiently at lower costs by implementing Just in Time inventory systems. Many years later, Michael Dell revolutionized the computer industry with his made-to-order business model that enabled him to function with zero inventories and earning almost double the profits that entrenched competitors with deep pockets could manage.
Since inventory is such a make or break item in the financials of a company, there is obviously an interest amongst analysts and investors who want to have a close watch on its performance. Hence, the inventory turnover ratio is amongst their favorites. This article explains the inventory turnover ratio in detail.
Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory*
Like all ratios, inventory turnover ratio also needs the same context for the numbers to become meaningful. It needs to be compared with the performance of others. Usually the comparison is done between:
Caution must be exercised by the analysts in drawing conclusions based on the inventory turnover ratio. Sometimes companies buy large amounts of inventories to beat the forthcoming price hikes. This may show up as an increasing inventory turnover ratio but may not be a bad signal in reality.
Also analysts must be wary of change in inventory policies before calculating and interpreting this ratio.
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