The inventory turnover ratio specifically focuses on how quickly a company’s inventory is sold and whether the company produces and stores inventory for long periods of time, or produces and sells that inventory quickly.Įvaluating a company’s inventory turnover ratio will give you a good idea of how a company is managing its inventory levels, the sales demand for a company’s products, and how quickly the company turns inventory into sales. This ratio is part of a larger family of financial ratios known as asset management ratios, or efficiency ratios, which measure how effectively and efficiently a company is managing its assets to produce sales and generate returns for shareholders (check out our deep dive into asset management ratios, which you can use to further understand how these ratios impact your financial analysis). Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average InventoryĪverage inventory used in the above formula is calculated using the following formula:Īverage Inventory Formula = (beginning inventory + ending inventory) / 2 What does the inventory turnover ratio measure The inventory turnover ratio is calculated by taking a company’s cost of goods sold (often referred to as cost of sales) during a period and dividing that amount by the average inventory during that period. With the inventory turnover ratio calculator, a good understanding of the ratio, and your brainpower, you'll have everything you need to effectively and efficiently analyze how a company is managing its inventory. Summarize a quick overview of our 5 step process for analyzing inventory turns.Provide an example to further enhance your understanding of the ratio, and.How the inventory ratio is calculated and what it measures,. We’ll cover a few main points, including: In this article we’ll dive into the important details that will help you calculate and use the inventory turnover ratio to enhance your financial analysis. Our inventory turnover calculator is a useful tool to help you calculate a company's inventory turns more quickly, but it takes more than just the calculator to use it effectively during your financial analysis. Quick Guide: The Inventory Turnover Ratio
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