1/31/2024 0 Comments High inventory turns![]() However, it’s important to note that ‘good’ inventory turnover ratios can vary widely depending on the industry. ![]() This could lead to higher storage costs and the risk of inventory becoming obsolete. On the other hand, a low inventory turnover ratio may suggest overstocking or difficulties in selling products (indicating lower demand or less effective selling strategies). In general, it’s seen as a positive indicator of business performance because it means inventory is not being held for long periods and capital is being used effectively. A high inventory turnover ratio typically indicates that a company is efficiently managing its inventory – selling goods quickly and thereby reducing storage, holding, and potentially obsolescence costs. The inventory turnover ratio provides significant insights into a company’s financial health and operational efficiency. It’s calculated by adding the beginning inventory and ending inventory, then dividing by two: Average inventory = (Beginning Inventory + Ending Inventory) / 2 The average inventory refers to the mean value of inventory within a certain period of time. This includes raw materials and labor expenses, but not indirect expenses such as distribution costs and sales force costs. In this equation, the cost of goods sold refers to the direct costs attributed to the production of the goods sold by a company. ![]() The format would look like this: Inventory turnover ratio = COGS / Average Inventory The inventory turnover ratio is typically calculated by dividing the cost of goods sold (COGS) by average inventory during a specific accounting period. ![]()
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