Feb 10, 2023
Inventory Turnover
What is Inventory Turnover
Inventory turnover is a financial metric used to measure the efficiency of a company’s inventory management. It measures how quickly a company is able to move its inventory from the time it is purchased or manufactured until it is sold. It is calculated by dividing a company’s cost of goods sold (COGS) by its inventory on hand.
Why Inventory Turnover is Important
Inventory turnover is an important metric because it indicates how efficient a company is in managing its inventory. Companies that have higher inventory turnover rates are more efficient in managing their inventory, which means they are able to get more out of their resources. In addition, inventory turnover is an important measure of profitability as it increases the amount of cash available to the company and reduces the costs associated with inventory storage.
How Inventory Turnover is Calculated
The formula for calculating inventory turnover is as follows:
Inventory Turnover = COGS / Average Inventory
Where COGS is the cost of goods sold and Average Inventory is the average inventory over a specified time period.
For example, a software company has a COGS of $1,000,000 and an average inventory of $500,000. The inventory turnover for this company would be 2.0 ($1,000,000 / $500,000).
Why Inventory Turnover is Important
There are several steps that companies can take to improve their inventory turnover rates.
These include:
Optimizing inventory levels: Companies should strive to maintain inventory levels that are in line with customer demand. This will help to ensure that the company does not carry too much or too little inventory.
Streamlining the supply chain: Companies should strive to reduce the amount of time it takes for orders to be fulfilled. This can be achieved by streamlining the supply chain and leveraging technology such as automation and artificial intelligence.
Utilizing data: Companies should leverage data to understand customer demand and optimize inventory levels accordingly. This will help to ensure that the company is able to meet customer demand without carrying too much or too little inventory.
Negotiating better terms with suppliers: Companies should strive to negotiate better terms with their suppliers in order to reduce costs and increase profits.
Implementing just-in-time inventory management: Companies should strive to adopt a just-in-time inventory management system, which allows them to order inventory only when it is needed. This will help to reduce costs and increase profits.
Why Inventory Turnover is Important
Investors value companies with high inventory turnover, as it indicates that the company is managing its inventory efficiently. A company with a high inventory turnover is able to meet customer demand without carrying too much or too little inventory, which leads to lower costs and higher profits. This in turn leads to higher stock prices and higher valuations.
How Inventory Turnover Relates to Other Financial Metrics
Inventory turnover is closely related to other financial metrics, such as gross margin, days sales outstanding (DSO) and accounts payable days (APD). A company with a high inventory turnover rate is likely to have a higher gross margin as it will be able to sell its inventory more quickly. Furthermore, a company with a high inventory turnover rate is likely to have lower DSO and APD, as it will be able to pay its suppliers more quickly.
Examples
Microsoft: Microsoft’s inventory turnover rate for the past five years has consistently been around 4.5, indicating that the company is efficient in managing its inventory.
Adobe: Adobe’s inventory turnover rate for the past five years has been around 3.2, indicating that the company is managing its inventory efficiently.
Oracle: Oracle’s inventory turnover rate for the past five years has been around 2.7, indicating that the company is managing its inventory well.
Sources
Investopedia. (n.d.). Inventory Turnover. Retrieved from https://www.investopedia.com/terms/i/inventoryturnover.asp
Investopedia. (n.d.). Days Sales Outstanding. Retrieved from https://www.investopedia.com/terms/d/dsos.asp
Investopedia. (n.d.). Accounts Payable Days. Retrieved from https://www.investopedia.com/terms/a/accountspayabledays.asp
Microsoft. (n.d.). Microsoft Corporation (MSFT). Retrieved from https://finance.yahoo.com/quote/MSFT/
Adobe. (n.d.). Adobe Inc. (ADBE). Retrieved from https://finance.yahoo.com/quote/ADBE/
Oracle. (n.d.). Oracle Corporation (ORCL). Retrieved from https://finance.yahoo.com/quote/ORCL/
Inventory Turnover
What is Inventory Turnover
Inventory turnover is a financial metric used to measure the efficiency of a company’s inventory management. It measures how quickly a company is able to move its inventory from the time it is purchased or manufactured until it is sold. It is calculated by dividing a company’s cost of goods sold (COGS) by its inventory on hand.
Why Inventory Turnover is Important
Inventory turnover is an important metric because it indicates how efficient a company is in managing its inventory. Companies that have higher inventory turnover rates are more efficient in managing their inventory, which means they are able to get more out of their resources. In addition, inventory turnover is an important measure of profitability as it increases the amount of cash available to the company and reduces the costs associated with inventory storage.
How Inventory Turnover is Calculated
The formula for calculating inventory turnover is as follows:
Inventory Turnover = COGS / Average Inventory
Where COGS is the cost of goods sold and Average Inventory is the average inventory over a specified time period.
For example, a software company has a COGS of $1,000,000 and an average inventory of $500,000. The inventory turnover for this company would be 2.0 ($1,000,000 / $500,000).
Why Inventory Turnover is Important
There are several steps that companies can take to improve their inventory turnover rates.
These include:
Optimizing inventory levels: Companies should strive to maintain inventory levels that are in line with customer demand. This will help to ensure that the company does not carry too much or too little inventory.
Streamlining the supply chain: Companies should strive to reduce the amount of time it takes for orders to be fulfilled. This can be achieved by streamlining the supply chain and leveraging technology such as automation and artificial intelligence.
Utilizing data: Companies should leverage data to understand customer demand and optimize inventory levels accordingly. This will help to ensure that the company is able to meet customer demand without carrying too much or too little inventory.
Negotiating better terms with suppliers: Companies should strive to negotiate better terms with their suppliers in order to reduce costs and increase profits.
Implementing just-in-time inventory management: Companies should strive to adopt a just-in-time inventory management system, which allows them to order inventory only when it is needed. This will help to reduce costs and increase profits.
Why Inventory Turnover is Important
Investors value companies with high inventory turnover, as it indicates that the company is managing its inventory efficiently. A company with a high inventory turnover is able to meet customer demand without carrying too much or too little inventory, which leads to lower costs and higher profits. This in turn leads to higher stock prices and higher valuations.
How Inventory Turnover Relates to Other Financial Metrics
Inventory turnover is closely related to other financial metrics, such as gross margin, days sales outstanding (DSO) and accounts payable days (APD). A company with a high inventory turnover rate is likely to have a higher gross margin as it will be able to sell its inventory more quickly. Furthermore, a company with a high inventory turnover rate is likely to have lower DSO and APD, as it will be able to pay its suppliers more quickly.
Examples
Microsoft: Microsoft’s inventory turnover rate for the past five years has consistently been around 4.5, indicating that the company is efficient in managing its inventory.
Adobe: Adobe’s inventory turnover rate for the past five years has been around 3.2, indicating that the company is managing its inventory efficiently.
Oracle: Oracle’s inventory turnover rate for the past five years has been around 2.7, indicating that the company is managing its inventory well.
Sources
Investopedia. (n.d.). Inventory Turnover. Retrieved from https://www.investopedia.com/terms/i/inventoryturnover.asp
Investopedia. (n.d.). Days Sales Outstanding. Retrieved from https://www.investopedia.com/terms/d/dsos.asp
Investopedia. (n.d.). Accounts Payable Days. Retrieved from https://www.investopedia.com/terms/a/accountspayabledays.asp
Microsoft. (n.d.). Microsoft Corporation (MSFT). Retrieved from https://finance.yahoo.com/quote/MSFT/
Adobe. (n.d.). Adobe Inc. (ADBE). Retrieved from https://finance.yahoo.com/quote/ADBE/
Oracle. (n.d.). Oracle Corporation (ORCL). Retrieved from https://finance.yahoo.com/quote/ORCL/