Inventory Turnover
Evaluation of Inventory Turnover Ratios
Abstract Effective inventory management is a top priority for companies looking to free up cash and leverage working capital. Inventory turnover varies widely across different industries and different companies. We will discuss how inventory management does affect company’s performance and which factors could affect the inventory turnover ratios. We analyzed five industries: pharmacy, automobile manufacture, grocery store, clothing, and restaurant industry. And we choose 2 companies from each industry to analyze by comparing their inventory turnover and gross profit percentage. We collected the financial statements from the past 2 years annual reports (appendix a) . We found the financial data from Bloomberg and the annual reports from U.S. Securities and Exchange Commission website (www.sev.gov). And then we analyzed the industry average ratios from RMA Annual Statement Studies.
Introduction
Inventory turnover, the ratio of a firm’s cost of goods sold to its average inventory level, is generally used to measure performance of inventory management, analyze short-term liquidity, and assess performance improvements over time. In general, a higher value of inventory turnover indicates better performance in controlling inventory levels. And a lower value may be an indication of over-stocking which may pose risk of obsolescence and increased inventory holding costs. Inventory Turnover=cost of good sold/average inventory
Average Inventory=(beginning inventory+ending inventory)/2 Gross profit percentage, the ratio of a firm’s gross profit to net sales, often used to judge operating profitability.The higher the gross profit percentage is, the healthier the business is. The gross profit percentage is a statement to measure how efficient the business is in making profit during the production process. Gross profit=revenue-cost of good sold
Gross profit percentage=gross profit/revenue*100% Industries
Abstract Effective inventory management is a top priority for companies looking to free up cash and leverage working capital. Inventory turnover varies widely across different industries and different companies. We will discuss how inventory management does affect company’s performance and which factors could affect the inventory turnover ratios. We analyzed five industries: pharmacy, automobile manufacture, grocery store, clothing, and restaurant industry. And we choose 2 companies from each industry to analyze by comparing their inventory turnover and gross profit percentage. We collected the financial statements from the past 2 years annual reports (appendix a) . We found the financial data from Bloomberg and the annual reports from U.S. Securities and Exchange Commission website (www.sev.gov). And then we analyzed the industry average ratios from RMA Annual Statement Studies.
Introduction
Inventory turnover, the ratio of a firm’s cost of goods sold to its average inventory level, is generally used to measure performance of inventory management, analyze short-term liquidity, and assess performance improvements over time. In general, a higher value of inventory turnover indicates better performance in controlling inventory levels. And a lower value may be an indication of over-stocking which may pose risk of obsolescence and increased inventory holding costs. Inventory Turnover=cost of good sold/average inventory
Average Inventory=(beginning inventory+ending inventory)/2 Gross profit percentage, the ratio of a firm’s gross profit to net sales, often used to judge operating profitability.The higher the gross profit percentage is, the healthier the business is. The gross profit percentage is a statement to measure how efficient the business is in making profit during the production process. Gross profit=revenue-cost of good sold
Gross profit percentage=gross profit/revenue*100% Industries