Question

What does a very high inventory turnover ratio signify for a firm? (Please give a new perspective)

Answer 1

Inventory turn over ratio means number of times a comoany has sold and repalced its inventory in a given period of time.

For example M/s XYZ has warehouse capacity of 10000 units of products at a time, and company saying inventory turnover ratio in the year is 5 means they stored 50000 units of stock in the full year and 5 times they replaced the existing stock.

Invetory turn over ratio can be found through following formula.

Sales/ Avg inventory

where Avg inventory = (Invetory at the begining+iventory at the end)/2

For Greater accuracy following formula is also accepted

Inventory turn over ratio = Cost of Goods Sold/ Avg Invetory

A very high invetory ratio can be indicated for two thinngs:

1. High Sales Volume can cause High Invetory Ratio

2. Low Storage Capacity can also Cause High Invetory Ratio