![]() Rather than being a positive sign, high turnover could mean that the company is missing potential sales due to insufficient inventory. back orders, delayed deliveries, and speed) must be evaluated to understand the reality of the circumstances, as well as to see if there is an adverse impact on revenue. In such cases, the amount of pent-up demand (i.e. ![]() However, if a company exhibits an abnormally high inventory turnover ratio, it could also be a sign that management is ordering inadequate inventory, rather than managing inventory effectively. That said, low turnover ratios suggest lackluster demand from customers and the build-up of excess inventory.įor example, retailers are typically known for exhibiting high turnover ratios – in particular, “fast-fashion” retailers like Zara are highly regarded for their ability to research trends and clear out their inventory quickly. The analysis of a company’s inventory turnover ratio to its industry benchmark, derived from its peer group of comparable companies can provide insights into its efficiency at inventory management.įor companies with low inventory turnover ratios, the duration between when the inventory is purchased, produced/manufactured into a finished good, and then sold is more prolonged (i.e. How to Interpret Inventory Turnover by Industry? Suppose a retail company has the following income statement and balance sheet data.įor 2021, the company’s inventory turnover ratio comes out to 2.0x, which indicates that the company has sold off its entire average inventory approximately 2.0 times across the period. ![]() Inventory Turnover Ratio Calculation Example We’ll now move on to a modeling exercise, which you can access by filling out the form below. The company’s inventory, if left unsold, might eventually need to be written down to reflect the true (lower) value on the balance sheet.
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