The inventory turnover ratio is a common measure of the firm’s operational efficiency in the management of its assets. As noted earlier, minimizing inventory holdings reduces overhead costs and, hence, improves the profitability performance of the enterprise. Ideally the inventory turnover ratio would be calculated as units sold divided by units on hand.If you like this article then please like us on Facebook so that you can get our updates in future ……….and subscribe to our mailing list ” freely “
Inventory Turnover RatioInventory turnover is an indication of the number of times inventory is sold or used during a specific time period such as one year. It is a good measurement to assess the frequency of movement of inventory towards production and thus it is a better indicator to look at the up and downs in sales.
Formula :Inventory turnover ratio = Cost of goods sold / Average inventory. Average inventory =1/2(opening stock closing stock).
- When compared to the industry's ideal ratio the higher the ratio of inventory turnover, the better the performance of an entity's overall inventory is, which means movement of inventory indicates better production thus there are sound sales.And the company is practicing an effective inventory management process.
- When the stock turnover ratio is low, this may indicate that the company does not keep or does not have sufficient quality of stock on hand to meet the production requirements. This may even lead to backorder of some products.
- As said in my previous posts on financial ratios, there should be the uniformity in the businesses being carried on by the companies whose inventory ratios you want to compare.