Inventory Turnover Ratio PDF

Running head: INVENTORY TURNOVER RATIO
Inventory Turnover Ratio
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INVENTORY TURNOVER RATIO2
Table of Contents
Implication of High Inventory Turnover Ratio:.........................................................................3
References:.................................................................................................................................5

INVENTORY TURNOVER RATIO3
Implication of High Inventory Turnover Ratio:
The inventory turnover ratio is an accounting term and measure for the level of
inventory which is present with a company. The ratio is known by many names such as Ratio
of stock turnover, ratio of turnover of merchandise and many more. The ratio is calculated by
dividing the cost at which the goods are sold by the level of average inventory which is
present in the firm. However, at times the cost at which the goods are sold is not present,
hence the sales or revenue is taken in place of the cost at which the goods are sold. The
average inventory can be calculated by dividing the inventory at the start of the financial year
and inventory at the end of the financial year with 2. Thus, however due to simplification and
ease of calculation the inventory at the end of the financial year is taken as the average
inventory (Kesavan, Kushwaha and Gaur 2016).
This ratio is used to calculate the number of days at which the inventory of the
company is turned around to sales. This is called the day’s inventory turnover ratio and is
represented in days while the inventory turnover ratio is denoted in times. This ratio is
important when analysing the financial statements of a company as it highlights the level of
inventory which is present with the company. This ratio belongs to the efficiency ratio and
highlights how efficiently the firm is able to handle its inventories (Hançerlioğulları, Şen and
Aktun 2016).
A high Inventory turnover ratio may help in analysing the efficiency and profitability
of a firm. This is because a high inventory turnover ratio implies the inventories of the
company are sold quickly and efficiently and company has less money stuck in the working
capital management. This may be due to various reasons such as a promotional campaign
which has been initiated by the company has led to the rise in sales. Thus the ratio needs to be
analysed over a period of years and if there is a sudden spike in this ratio, the cause of the