How to calculate inventory turnover ratio?

This is a free lecture from Become an M&A Analyst: the Complete Skillset course.

For the full course: mna-analyst.com/courses/become-an-mna-analyst-t…

---

How to calculate inventory turnover ratio?

Inventories or stock may represent raw materials, work in progress and all finished goods of a business.

The inventory turnover ratio shows us how efficiently the inventories of a firm is managed.

The inventory turnover ratio is found by dividing total cost of goods sold by average inventories – as you remember we take the average of the last two years in order to avoid possible one-off effects.

Once we find the inventories turnover, we can find the days inventories outstanding which will give us, on average, the number of days the company keeps its goods as inventories/stocks before they are sold.

The days inventories outstanding is found by dividing the number of days in a year, which is 365, by the inventories turnover rate we just found. The number we get will tell us, on average, in how many days it takes for the company to turn its stocks into sales.

A shorter period indicates a more efficient management of inventories/stock. However, as in the case of accounts receivables, days inventories outstanding depends on the sector. For instance, the fast casual retailer Zara is known for its very efficient turnover days which are around 2 weeks. That means a Zara item waits only 2 weeks as an inventory before it was sold. However, this period can be much longer for a construction company as it takes a much longer time to turn its stocks into a sellable product.

The Sooner a company turns its inventories into sales, the less working capital it will require.

To learn more: www.mna-analyst.com