![]() If you are comparing inventory turnover figures using various data vendors, you should make sure that the figures are computed using the same method.Īnother way to look at how quickly a company moves its inventory is with the inventory days, or days in inventory, measure. We prefer to use cost of goods sold for measuring inventory turnover, and this is how the figure is calculated in AAII’s fundamental database and stock screening program Stock Investor Pro. To arrive at average inventory for a period, merely add the inventory value at the beginning of the period to the inventory value at the end of period and divide this sum by two. ![]() Furthermore, average inventory is often used to minimize seasonal factors that may impact inventory levels. However, sales are recorded at market value while inventory is typically recorded at cost. On occasion, this ratio is calculated using sales or revenues as opposed to cost of goods sold. Inventory turnover is calculated by dividing cost of goods sold by average inventory. It indicates how many times, during the course of a quarter or year, a company sells and replaces its inventory of component parts, materials and final products. Inventory turnover measures how quickly a company is moving inventory off the shelves to customers. Furthermore, companies must sell merchandise to generate the cash needed to pay bills and turn a profit. This is because companies have limited funds to invest in inventory and cannot stock an unlimited supply of the items they sell. Table 1 provides a quick look at the formulas used to calculate inventory turnover.Īs an investor, you would like to know how much money a company has tied up in its inventory. In this column, we take a closer look at one operating ratio: inventory turnover. In general, the better these ratios, the better the company is and the better it is for shareholders. ![]() When using these ratios, it is important to consider both short-term assets, such as inventory and accounts receivables, and long-term assets such as property, plant and equipment. Operating performance ratios look at how well a company turns its assets into revenue as well as the efficiency by which it converts merchandise into cash. ![]() Ratios can help evaluate a company’s liquidity, profitability, debt levels, cash flow, valuation, and operating performance. There are a variety of ratios that analysts use to judge the attractiveness of a company as an investment. Ratio analysis forms the cornerstone of fundamental stock analysis. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |