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What is the meaning of Inventory Turn-Over Ratio ? Is high Inventory Turnover Ration and indicator of poor performance ?
A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."
Inventory Turnover
Sales / Inventory
COGS/ Avarege inventory
a) The number of times inventory is sold and replaced is the inventory turn over ratio.
b) With regard to the performance the inventory turn over ratio , the ratio shall be compared against the industry averages and cannot be measured across . A high value than the average indicates the company is performing better than the average performer , It is able to sell its products faster from the inventory.
A high ratio implies either strong sales or ineffective buying. High inventory levels are often considered to be unhealthy for a firm as they represent an investment with a rate of return of zero.
The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. This measures how many times average inventory is "turned" or sold during a period. In other words, it measures how many times a company sold its totalFormula
high turnover ratio consider poor performance (to great extent its true)
Stock turnover ratio (STR) is the number of times a merchandise is brought and sold in a store. Each sector has an industry average number. STR is a major component of Gross Margin Return on Investment(GMROI). Higher the STR higher the GMROI. A STR higher than the industry average is always healthy. However, a very high STR could be due to ineffective buying of merchandise. For example if an apparels store has a STR of4 it shows a good control of inventory & if the STR is above6 for a apparels store it could be due to ineffective buying. So as soon as the STR goes above5, the manager should make layout changes & allocate more space for that particular Brand/Category.
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