“Stock” Supply Data: Inventory Turnover
For stock investors analyzing prospective investments and their own holdings, one important issue concerns how much money a company has tied up in its inventory.
Properly managing inventories is challenging. On the one hand, firms must sell merchandise to generate the cash needed to pay bills and turn a profit. But companies also have limited funds to invest in inventory, and cannot stock an unlimited supply of the items they sell.
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How can you judge a company’s ability to manage inventories? Two operating performance measures are particularly useful:
- Inventory turnover ratio, and
- Number of days in inventory.
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