What does our company’s inventory turnover tell investors?
If the stock turnover is higher, it is better. The high value of turnover shows that the stock was sold on average several times to build the total amount of value recorded as the cost of goods sold. On the other hand, the low value shows us that the company processes its inventory only a few times a year. When we look at inventory days, the smaller the number, the better. The high value of inventory days shows us that the company spends a lot of time rotating its products, thus taking more time to turn them into cash to maintain the business.
On the other hand, if the company needs fewer days to free up inventory, it will be in a better financial position because cash inflows will be stronger. Therefore, if you are an investor you want to be on the rise over the years to inventory turnover and decline in inventory days. The reasons why a company can achieve better inventory management are as follows:
- If a company improves its procurement process it may be that it has got better suppliers, so access to raw materials is easier and faster;
- The company has improved its production process by preparing products for sale in less time;
- The company analyzes the needs of customers and then precisely produces what customers want most so that it sells its products in a shorter period and thus sells faster.
On the other hand, if inventory ratios worsen, stagnation in the company’s growth may occur. This usually happens due to problems with suppliers, production processes, or competitors. The deterioration is mostly reflected in companies that produce cars or steel. Because if the company stores stocks for a long time, problems will arise. About inventory turnover and its management as we compare companies. It is best to choose the following criteria:
- A company that has a higher stock turnover is much better;
- A company that has fewer days of stock is much better;
- A much better company shows an appropriate trend slope over the last five fiscal years.
And one more thing, we should not compare companies like the type of company that sells mobile phones with the company that sells airplanes, because they will not have the same ratio of inventory turnover.