A Vital Factor to Determine the Health of a Business The health of a business selling physical products can be determined in many ways, but inventory turnover is one of the most important.
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Successful stock trading isn’t as hard as it used to be, thanks to advanced direct access trading platforms that facilitate online trading. Making the right decision about stocks depends on factors such as the health of the companies and their prospects for the future. One of the factors you need to consider about the health of a business is its inventory turnover. In-depth Understanding of Inventory Turnover Inventory turnover is an important measure for businesses, particularly those in the retail and production sectors. It is the ratio that depicts the number of times in a particular time period a company has sold its inventory and replaced it. In other words, it just shows how fast a company is able to sell off the products it has manufactured or, in the case of retail stores, the products the stores have bought for sale. Finding the inventory turnover helps the company to divide the number of days in that period by the turnover to calculate the number of days required for selling the inventory. Inventory turnover can also be calculated by dividing the cost of the goods sold with the average inventory. Inventory turnover provides many useful pointers for businesses. It shows which products sell faster and which of them don’t make it off the shelves at all. That information can enable companies to make more informed decisions regarding pricing their products. They can decide which products to focus their manufacturing efforts on, and which to develop more marketing strategies for. It also gives them a greater indication on when to purchase or acquire new inventory. Inventory Turnover and Company Health Now how is inventory turnover a measure of the health of the business? It is with the inventory turnover that analysts compare the performance of a company to the industry averages.
A high inventory turnover shows that the business is able to sell its products fast and replace them with new ones. In a negative sense, high inventory turnover ratio could also indicate that the company’s inventory is insufficient to meet the demand, resulting in much of the business being lost. So production and supply need to be ramped up.
Low turnover indicates that sales are weak for the company. It needs to ramp up or modify its marketing strategies to ensure better sales. Perhaps there is a flaw in the product that needs to be rectified. Sometimes the product just couldn’t be what most customers want. In that case, manufacture of the product should stop, or the company must make changes to it. Low turnover could also mean that the
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company is overstocking or overproducing stuff, resulting in excess inventory. That means the company probably needs to slow down its manufacturing, or produce lesser units. Faster Turnover Equates to More Sales and Earnings It doesn’t take rocket science to figure out that a healthy inventory turnover level indicates good sales and that the company is performing well. Not only does faster turnover guarantee more sales and earnings, it also ensures profitability because lesser turnover indicates that the inventory is held up more and the business is spending more on the space to store the products, insurance of the products, and their preservation. There is also the risk of theft or spoilage of the goods. Of course, high inventory turnover only has significance if the company makes profit with each sale made. Only then does the inventory turnover contribute to the positive return on assets, which is calculated from the inventory turnover. So now you have a very important factor to take note of in analyst reports to help you decide which stock is worth going for.
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