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Inventory/stock turnover ratio (in days)

Method of calculation

Formula for inventory (stock) turnover ratio in days (inventories cycle): inventory / net revenues from sales * number of days in the period

Ratio's description

The inventory turnover ratio (in days) informs about the approximate number of days for which the cash is frozen in inventory. In other words, this ratio informs about the period of inventory renewal (in days). Ratio's values depend on the production technology used (affecting the length of production cycle) and the inventory management policy. The increase of inventories cycle value may indicate stockpiling, which combined with lowered demand (e.g. no increase in sales) is assessed negatively.

Ratio's interpretation

  • When assessing the changes in ratio's value over time (over few periods):
    • the decrease of inventory turnover ratio in days is assessed positively and interpreted as an improvement of the inventory management efficiency – as a result the requirement for capital decreases, which in turn improves financial liquidity, lowers the financial costs and improves the profitability,

       

    • the increase of inventory turnover ratio in days is assessed negatively and interpreted as a deterioration of the inventory management efficiency – as a result the requirement for capital increases, which in turn deteriorates financial liquidity, increases the financial costs and deteriorates the profitability,

       

    • if the ratio's value increases and the level of sales is stable or decreasing, then such a situation may indicate stockpiling effect in the company (which should be thoroughly investigated).

       

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