Inventory Turnover Ratio
Inventory turnover ratio shows how quickly company’s inventory is changing compared to its sales or cost of goods sold. This ratio shows how effectively inventory is managed in company’s production/distribution process.
Inventory turnover ratio usually is compared to the same ratio of similar companies. If this ratio will be used to compare with companies of others sectors, it will be meaningless because every industry has some business specialties and different turnover ratio is normal.
Normally the higher inventory turnover ratio is the better because it shows that inventory is in better management (less working capital is needed, which means you save some investments in capital); however, if inventory is very low and company has financial problems, it may be another indicator that problems are very serious.
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