![]() ![]() They can notice the base if they take an average inventory turnover ratio. One can understand whether the ratio is high or low by looking at the inventory ratio of similar companies in the same industry. As a result, the company’s inventory becomes a slow-moving inventory, which leads to higher inventory costs and fewer profits. On the other hand, when the inventory turnover ratio is low, it signifies that a company’s inventory turnover is very low, and its products are often not sold in the market. Hence, a high figure will mean a good inventory turnover ratio. read more and fewer chances of obsolescence. It is calculated as the sum total of storage cost, finance cost, insurance, and taxes as well as obsolescence and shrinkage cost. When the inventory turnover ratio is high, it depicts that the company has been managing its inventory quite well, with lesser holding costs Holding Costs Holding cost refers to the cost that an entity incurs for handling and storing its unsold inventory during an accounting period. It is the end product of the company, which is ready to be sold in the market. It indicates Colgate is taking a bit longer to process its inventory into finished goods Inventory Into Finished Goods Finished goods inventory refers to the final products acquired from the manufacturing process or through merchandise. However, if we observe closely, Colgate’s inventory turnover was slightly lower from 2013 to 2015. Historically, Colgate’s inventory turnover has been in the range of 5x-6x. read more – raw material and supplies, work in progress, and finished goods. The raw material is direct material inventory, work in progress inventory is partially completed inventory, and finished goods inventory is stock that has completed all stages of production. Colgate’s inventory consists of three types of Inventory Types Of Inventory Direct material inventory, work in progress inventory, and finished goods inventory are the three types of inventories. It provides valuable information about the organization's profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements. You may download this excel sheet from Ratio Analysis Ratio Analysis Ratio analysis is the quantitative interpretation of the company's financial performance. Example 2 – Colgate’s Real-Life Scenarioīelow is the snapshot of inventory turnover calculations. Or, Inventory ratio= $600,000 / $120,000 = 5.īy comparing the inventory turnover ratios of similar companies in the same industry, we would conclude whether the inventory ratio of Cool Gang Inc.Inventory ratio = Cost of Goods Sold / Average Inventories. ![]()
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