Stock turnover measures how many times a company sells through its inventory, and can be calculated by dividing sales by inventory or cost of goods sold by average inventory. Accounting ratios can evaluate the efficient use of a company’s assets. Companies use inventory turnover reports to improve revenue and reduce costs.
Stock turnover represents how many times a company sells through its inventory. Retail stores often use this metric to determine the efficiency of their operations. High inventory turnover generally results in high consumer demand for the company’s products. Accounting ratios provide information on calculating turnover and evaluating the efficient use of a company’s assets. Information from a company’s income statement and balance sheet is needed to calculate this figure and evaluate operations.
A company has two options for calculating inventory turnover. First, the formula can divide sales by inventory; second, accountants can divide cost of goods sold by average inventory. Both formulas will provide the information you need to review stock turnover and determine how well the company sells through its inventory. Accountants can calculate ratios at any time during the year. Monthly and annual calculations are often the most common use of this accounting report.
An example is a company that has $125,000 United States Dollars (USD) in sales and $85,000 USD in inventory. The stock turnover for this company is 1.47, which means the company sells through its complete inventory nearly one and a half times each period. Assuming these formulas are valid for only one month, the company must order at least half of its current inventory to meet sales. The ratio itself can’t really determine the efficient use of resources. More steps are needed to demonstrate efficiency or evaluate operations.
Accounting reports are common reference tools for evaluating a company’s operations. Accountants can track stock turnover for several consecutive months. The benchmarking process compares the current inventory turnover ratio to previous periods in an effort to find out whether the company’s inventory turnover is better or worse. Companies can also use the report to compare their operations against an industry standard. This helps a company find out whether it performs better or worse under the same economic conditions as other companies.
High inventory levels are often a major disadvantage in commercial operations. Typically, businesses experience increases in operating costs, including transportation, processing, accounting and management, and expenses. Companies use inventory turnover reports and review processes to determine if they can improve revenue to increase sales and reduce costs. For example, if a company’s inventory revenue is below the industry average, there is potential to increase revenue. Stock turnover above the industry average, however, may indicate that a company is operating as efficiently as possible and unable to improve bottom line.
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