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Inventory turnover ratio = Inventory/Cost of sales*365 days
Inventory turnover ratio shows the flow speed of inventory. An increasing number of days shows the inventory is turning over less quickly. And generally it is regarded as a bad sign:
- It may reflect unsalable inventory.
- It may reflect poor inventory control, more cost on storage.
- It may reflect the inventory will be obsolescent.
But sometimes it shows other imformation:
- Larger quantities for the trade discounts.
- Avoid the inventory shortages.
- For reducing the cost of inventory, because the price of the inventory will rise in the near future.
Inventory turnover ratios vary enormously with the nature of the business. For example: in fishing sales, maybe 1 to 2 days, but for a building contractor it could be 200 days.
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