Inventory turnover ratio

Before investing in business, a business person is faced with the need to decide on what kind of stock will be on the balance sheet. The main idea should be based on how quickly it will be converted or sold.

The ratio of inventory turnover (assets) is a direct indicator of the company's operational efficiency for managing its assets. Minimizing inventories reduces overheads, hence, improves the profitability of the enterprise. The amount of time a company picks up its stock depends largely on the industry. Thus, retail stores that sell perishable products, fashionable, high-tech goods have a higher turnover, compared with enterprises that sell durable goods. As well as the companies of the processing industries in relation to the manufacturers of heavy equipment.

Therefore, the comparison is only valid if it is made between two companies representing the same industry. There is a good rule of thumb in that if the stock turnover ratio is multiplied by a gross profit ratio (in percent) and it is 100 percent or more, the reserves are in the optimal ratio.

In general, a high turnover indicates a better performance, low - means ineffective management, overstocking, deficits in the production line or marketing activities. But at the same time, in high turnover sectors, increased turnover can lead to loss of sales due to an inventory deficit, and a low percentage is advisable when prices are expected to rise or a deficit in the market.

The stock turnover ratio is calculated in accordance with accounting standards using the formula: the value of goods sold ÷ the average value of the inventory. This is one of the most important financial ratios, measuring the liquidity of the company's assets. It helps the business owner determine how to increase sales by controlling the state of stocks.

Most investors focus on income and profit growth. Some pay attention to cash flow. But not everyone digs into balance sheets, examining things such as receivables, documents for payment and assets.

Inventory turnover ratio Is extremely important. The business owner needs to understand why the ratio of their turnover is high or low. To do this, he must consider the company's investment in inventories, and determine which are the most productive. It is also important to use comparative data, such as a time trend or industrial data, so you can compare the company's assets to analyze too high or too low turnover. The coefficient formula reflects The period of turnover of stocks and is interpreted, as An indicator of how many times the company sold them within a year (quarter).

Asset turnover is really a missed metric in the company. At the same time, it directly affects profit, cash flow, enterprise success. It is clear, of course, too many stocks in the warehouse or shelves threaten obsolescence of goods and the impossibility of selling it. While too little of them leads to a deficit and a possible loss of the consumer. Any problem will be worth the business money. It is the thorough analysis of the company's reserves that helps to shed a lot of light on its productivity. What efforts are there to make the right investments in assets? It is necessary to categorize them into "dead", "slow", productive and sale. There is an unspoken rule - 80/20 - for different situations in business. 80 percent - sales, 20 percent - from the turnover of stocks.