Inventory turnover

A measure representing the number of times a firm sells and replaces its inventory during a given period and calculated by dividing the cost of goods sold by the average inventory level,the measure can be calculated for any type of inventory—materials and supplies used in manufacturing or service delivery, work in progress, finished products, or all inventory combined. With the exception of completed product inventory, the calculate applies to service and manufacturing businesses
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Cost of Goods Sold from Stock Sales during the Past 12 Months
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Average Inventory Investment during the Past 12 Months

For example; if a company was able to generate RS 100 crore in sales but averaged RS 50 crore in inventory, the inventory turnover would be 100 crore / 50 crore = 2. This number indicates that there would be 2 inventory turns per year, meaning that it would take 6 months to sell all the inventory.'
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Higher inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to problem should prices begin to fall

1 comment:

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