Inventory turnover analysis

If the inventory turnover increased, it is not possible to analyse that is satisfactory or unsatisfactory, because the nature of the business is unknown. The result of analysing is depended on the nature of the business.
For example, a jeweller will have a low inventory turnover ratio, but a fishmonger selling fresh fish will hope to have a very high inventory turnover ratio. Now, let’s analyse it.

The inventory turnover (inventory turnover ratio) is:

or

An increasing number of days (or a diminishing multiple) implies that inventory is turning over less quickly. This is usually regarded as a bad sign because:

1. lack of demand for the goods
2. poor inventory management
3. ultimately lead to inventory obsolescence and related write-offs.

But sometimes, the increasing number of days will be needed:

1. buying inventory items in larger quantities to take advantage of trade discounts
2. avoid inventory shortages
3. the increase is slight and due to distortion of the ratio caused by comparing a year end inventory figure with cost of sales for the year when that year has been one of increasing growth.

And you should know some manufacturers may consider:

1. reliability of supplies, if the fupplier is unreliable it is prudent to hold more raw materials
2. demand, if demand is erratic it si prudent to hold more finished goods.

So, the result of analysing is depended on the nature of the business.

Related posts:

1. Inventory turnover ratio
2. Inventory turnover formula
3. Calculate inventory turnover
4. Current ratio analysis
5. Quick ratio analysis