Question

Inventory turns of Target in 2017 and 2016 are 0.18 and 0.16

Cash for Target in 2017 and 2016 are 2.46 and 1.22

Why do you think there are differences in inventory turns and cash? put your answer in details, please.  

Answer 1

Inventory turnover (or turns) is an indicator of how many times the inventory is cycled. This is provided by total cost of goods sold divided by average inventory. This means as we see an increase in inventory turnover for Target, we can infer that the company’s inventory management system is improving. This owes to either of the two situations

• There has been an increase in total cost of goods sold
• There has been a decrease in average inventory level

One or both of the above situations are taking place. The first situation indicated increased sales for the company. This is a good sign. The second situation indicates operational efficiency. This too is a good sign for the company. It is also possible that both of them are taking place simultaneously.

The cash indicates the company’s liquid asset. The increase in cash from 1.22 to 2.46 means increase in revenue for the company. However, this could also happen for various other reasons. For example, increase in profit margin or markup price could increase the cash flow for products with inelastic demand. There could be a possibility that cash cycle that the company operates with has increased for vendors due to Target’s bargaining prowess. But considering the two factors, inventory turnover and cash, the likely conclusion that we can make is that while the average inventory level remains the same, Target has boosted their sales volume. This has caused an increase in cash and increase in inventory turnover ratio.