A high inventory turnover ratio means that the company receives cash more frequently and thus can maintain sufficient liquidity.
The importance of the inventory turnover ratio can also be attributed to its ability to measure a company’s liquidity.
This allows investors to decide if the company is a good investment. Inventory turnover ratio analysis helps assess if a company has cleared inventories faster than its competitors. For example, retail organisations have considerably higher inventory rates than airline manufacturing companies. However, the ratio depends on the complexity of the business environment and the type of products. This information is used to compare the company’s efficiency against industry standards. The inventory turnover ratio is critical for assessing how fast a company sells its inventory. This takes the data for the past 2 financial years. Use Tickertape Stock Screener to find the inventory turnover ratio of a company. Using the sales figure instead of COGS can lead to an inflated ratio. This is because the inventory value is based on its cost, whereas the sales price includes the company’s profit. The inventory turnover ratio uses the cost of goods sold instead of sales. Using average value helps to offset the effects of seasonality.
Note: Here, the average inventory value is used because many businesses are seasonal. Inventory turnover ratio = Cost of goods sold / Average value of inventory
