Efficiency ratios allow measurement of how well management operates this business; that is, how efficient they are in particular areas.
The efficiency ratio we look at here is the Inventory Turnover. This ratio measures how many times in a given period a business is able to sell its average level of inventory.
It is obvious that a business wants to sell its inventory as quick as possible and not leave it sitting on the shelf, so to speak. So the Inventory Turnover tells us how many times a business sells its inventory, replaces it and sells it again and so on.
In regards to ‘efficiency’, the Inventory Turnover tells us how efficient a business is at stocking and selling its inventory… and stocking and selling inventory is obviously a very important aspect of those businesses that hold inventory.
A result of 7.6 can be interpreted as the business has stocked the shelves of inventory and completely sold out 7.6 times over. While the figure uses average inventory (and a business normally orders different levels of inventory over the period) the COGS figure should be very accurate and therefore ‘7.6 times’ can be a good benchmark.
Inventory Turnover Formula
Cost of Sales / ((Inventory at Start of Period + Inventory at End of Period) / 2)
Inventory Turnover Calculator
The calculator asks for:
Cost of Sales (COGS), which is found in the Income Statement.
Inventory at the Start of Period, which is found in the previous Balance Sheet.
Inventory at the End of Period, which is found in the current Balance Sheet.
Want to know more about the Ratios used in the S&P500 stock calculations, including all formulas?
Check out their individual ratio pages via the main menu for Descriptions, Calculators & Formulas
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