Financial Statements & Ratios
Inventory Product i v i ty Rat i os
Given the significance of inventory, it is important to measure the productivity of these asset investments using the ratios on this page. The objective is not necessarily to minimize the inventory value. Rather, the objective is to utilize the investment for maximum profitability. Inventory Turnover = Cost Of Goods Sold ÷ Average Inventory Inventory turnover is an indication of the velocity with which merchandise dollars move through the business. In the case of the typical Ace Core Hardware store, the turnover figure of 3.2 means that the store sells out the equivalent of its inventory value 3.2 times per year. Inventory Holding Period = 365 Days ÷ Inventory Turnover The inventory holding period reflects how many days of inventory are on hand. That is, it shows how long it should take to sell off the existing inventory. Business managers and owners must be concerned with a holding period that is longer than necessary due to the high costs of capital tied up in excess inventory. On the other hand, reducing inventory levels too much could result in lost sales if certain products are not available when the customer wants them. The cost of carrying inventory has to be balanced against the profit opportunities lost by not having product in stock ready for sale. Sales To Inventory Ratio = Net Sales ÷ Average Inventory At Cost The sales to inventory ratio is another method for measuring how quickly inventory turns over in the business. It demonstrates how much sales volume is produced per dollar of inventory investment. The figure of 5.4 for the typical Core Hardware store indicates that the store generates $5.40 of sales annually for each dollar tied up in inventory. Gross Margin Return On Inventory = Gross Profit Before Patronage Dividend ÷ Average Inventory x 100 The basic objective of Gross Margin Return On Inventory (GMROI) is to view the inventory from a return on investment perspective. Consequently, the ratio measures how many gross profit dollars are produced from each dollar tied up in inventory. GMROI facilitates the evaluation of products with widely varying gross margin and inventory utilization rates.
Conven-
Contractor
ience
Core
Super
Home Center
Oriented
Hardware
Hardware
Hardware
Supply
Inventory Productivity
Inventory Turnover
3.3
3.2
3.3
3.9
3.5
Inventory Holding Period (Days)
109.9
115.3
110.3
93.8
103.7
Sales To Inventory Ratio
5.2
5.4
5.5
5.9
4.9
Gross Margin Return On Inventory (%)
202.5
213.9
213.5
191.8
171.2
12
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