Thursday, August 30, 2007

How To Use Inventory Turnover Ratio

When an investor or stock analyst wants to find out how fast a company is selling it's inventory, they merely need to turn to the Inventory Turnover Ratio. An easily calculated ratio, the Inventory Turnover is found by seeing how many times average inventory can be divided into cost of goods sold. This is one tool that a financial analyst might use.

Inventory Turnover Ratio = (Cost of Goods Sold) / (Inventory)

Use of this equation can also give someone an idea of how long inventory is sitting around in the warehouse. For example, if inventory is rotating out at a ratio of 5, that means that the entire inventory has sold 5 times. Simple take 365 days and divide by 5. There you go, the inventory will turnover once every 73 days.

This ratio is best used with a little bit of comparison. See how particular companies compare against their peers in the same industry.

Thanks for visiting. -------Sincerely, Trevor Stasik

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