This is known as Days Sales of Inventory (DSI).ĭSI is the number of days it takes a company to sell its inventory. But it is also important to understand how many days it takes to sell its inventory. Inventory turnover ratio tells you how often a company restocks its entire inventory. In short, a higher inventory turnover ratio is always preferred. It won’t have the funds to launch new products or spend on marketing.Ī consistently falling inventory turnover ratio is a BIG red flag for investors. The company is unable to sell its inventory once in the entire year. On the other hand, Kinetic Engineering Ltd has the worst turnover ratio. With high cash flow, it can launch new bikes, expand overseas etc. Notice that Bajaj Auto Ltd has the best inventory turnover ratio. The below table shows the turnover ratio of top companies in 2/3 wheeler sector. Notice how inventory turnover ratio is closely tied to a company’s profits. This will bring in more customers and increase his profits. The more cakes he sells, the more money he has to bake fresh cakes. He has to maintain a high turnover ratio as customers will not buy stale cakes. The frequency at which he sells the cakes is his inventory turnover ratio. You will instead visit another cake shop which is selling freshly baked cakes.įor the cake shop owner, cakes are inventories. So, you visit a cake shop, but the cakes are not fresh. Let us understand how inventory turnover ratio works with this simple example. Understanding Inventory Turnover Ratio with an Example It does not work for Information & Technology (IT) or service sector companies. This includes FMCG, Departmental stores etc. It is mostly used to analyse sectors which have tangible inventory. Generally, turnover of FMCG companies is higher than real estate, steel or power companies. It can no longer spare funds to produce new products or expand its presence. It also adversely affects a company’s cash flow. They have to pay for storage costs, insurance, rent, utilities etc. Maintaining unsold inventory is expensive for companies. These are items which are at the end of their product life cycle. This leads to an increase in dead or obsolete inventory. This happens when the demand for a product falls. One of the reasons for a low inventory turnover rate is weak sales. So, it can produce more goods and make more money. More sales means more revenue.Ī high stock turnover ratio frees up a company’s cash flows. It also tells you that the company is selling its products at a faster rate. It shows that a company’s products are in high demand. It is an activity ratio which shows the number of times a company sells, restocks or consumes its inventory.Ī high inventory turnover ratio is ideal. Inventory turnover ratio is also known as stock turnover ratio or stock turns. Whereas the inventory turnover ratio of Jindal Steel & Power Ltd is only 1.74. This means that HUL sells its entire inventory 6.98 times in a year. Hindustan Unilever Ltd.’s inventory turnover ratio is 6.98. Inventory turnover ratio is the number of times a company sells its entire inventory in a year. What is the meaning of inventory turnover ratio?
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