![]() ![]() A good place to start is a company’s Standard Industrial Classification (“SIC”) Code. The second step in your analysis is to research the company and identify its industry and sector. Identify the Company’s Industry and Sector Once you know where a company currently stands, you can use this information to evaluate whether there are positive or negative trends that could impact the future results of the company. The first step in your analysis is to see what you can learn from the historical results of the Company. Analyze the Historical Trends of the Company If you're interested in learning more about financial ratio analysis, including examples of how to complete and interpret the results of your analysis, we've covered this framework and walked through the below steps in greater detail here. We'll touch on five key steps to simplify your analysis of a company's inventory turns below. The 5 steps for powerful financial ratio analysisĪnalyzing financial ratios can be difficult, and knowing where to start and how to complete your analysis prevents some people from ever getting started. In order to use this ratio to understand how a company is performing, and use that information to confidently make a decision requires further analysis. The worst case scenario is that a company could have significant excess inventory, which could result in the inventory expiring or going obsolete before the company is able to sell it all. ![]() If a company's ratio is low, or slowing compared to the company’s historical inventory turns, that could be an indicator that the company’s sales are slowing, or they aren’t managing their inventory levels effectively. A higher ratio indicates a company is selling their inventory quickly and they are doing a good job of managing their production and sales - both good signs! In most cases, the higher the ratio, the better. What is a good inventory turnover ratioĪnalyzing whether a company's ratio is strong depends on various factors, including the nature of the company’s operations, the trend of the company’s ratio over time, and how the company measures up to its peer group and industry competitors. 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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