In accounting, inventory represents a company's 澳洲幸运5官方开奖结果体彩网:raw materials, work in progressꦓ, and finished products. Financial profes🦄sionals use a wide variety of quantitative and qualitative techniques to understand inventory in their investing analyses.

Quantitative techniques involve performing ratio analysis of the inventory by calculating ratios using 澳洲幸运5官方开奖结果体彩网:financial statements. The 澳洲幸运5官方开奖结果体彩网:qualitative analysis includes inspecting notes to financial statements to check inventory valuation methodology and its consistency, researching 澳洲幸运5官方开奖结果体彩网:inventory valuation me💮thods used by competitors, and comparing them to the method used by the company.

In finance, 澳洲幸运5官方开奖结果体彩网:ratio analysis is done by calculating ratios using historical inventory balances. The purpose of this analysis is to detect a company's problems with 澳洲幸运5官方开奖结果体彩网:inventory management, such as difficulty selling inventory, inventory build-up, and obsolescence. In this article, we'll review the most common inventory ratios: days inventory outstanding, inventory turnover, and inventory to sales ratio.

Days Inventory Outstanding

The days inventory outstanding ratio is calculated as inventory divided by the 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS) and then multiplied by 365. This ratio measures the average number of days a company holds inventory before selling it. This ratio widely varies across industries and is most helpful when compared to a comp🌳any's peers.

If the ratio increases over time and is much higher compared to its peers, this can be a red flag that the company is struggling to clear its inventory. Holding unsold inventory is costly because money is tied up in an idle resource with no income until the inventory is sold. It is costly to store inventory, especially when it requires special handling. Also, certain 澳洲幸运5官方开奖结果体彩网:inventory gets obsolete and may require selling at a significant discoun🐈t just to get rid of it.

Inventory Turnover

澳洲幸运5官方开奖结果体彩网:Inventory turnover is calculated as the ratio of COGS to 澳洲幸运5官方开奖结果体彩网:average inventory. Sometimes revenues are substituted for COGS, and average inventory balance is used. Inventory🧔 turnover is especially important for companies that carry physical inventory and indicaꦺtes how many times inventory balance is sold during the year.

Similarly to the days inventory outstanding ratio, inventory turnover should be compared with a company's peers due to differences across industries. A low and declining turnover is a negative factor; products tend to deteriorate and lose their value over time.

Inventory to Sales Ratio

Inventory to sales ratio is calculated as the ratio of inventory to revenue. Some analysts use♊ an average inventory balance. An increase in this ratio can indicate a company's investment in inventory is growing quicker than its sales, or sales are decreasing.ꦆ

On the other hand, if this ratio decreases, it can mean that a company's investment in inventory is decreasing in relation to revenues, or revenues are growing. The inventory to sales ratio provides a big picture 澳洲幸运5官方开奖结果体彩网:on the balance sheet and can indicate whether a more thorough analysis of in💖ventory is needed.

Manipulating Earnings

In addition to performing ratio analysis, you might find that reading the notes to a company's financial statements is a helpful extra step in inventory analysis. The U.S. 澳洲幸运5官方开奖结果꧅体彩网:generally accepted accou💧nting principles (GAAP) allow different valuation methods for inventory (such as 澳洲幸运5官方开奖结果体彩网:last in, first out (LIFO); 澳洲幸运5官方开奖结果体彩网:first in, first out (FIFO); and average cost). A company's management can attempt to use this discretion to manipulate its earnings. By reviewing a company's financial stateᩚᩚᩚ🗹ᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚment notes, you might be able to glean some telltale signs of this manipulation.

For example, look for any changes in 澳洲幸运5官方开奖结果体彩网:accounting policies related to inventory. Frequent and unjustified changes to inventory valuation methods can indicate 澳洲幸运5官方开奖结果体彩网:earnings management. Also, comparing a company's inventory valuation methodology with that of its peers can provide a common-sense check on whether the company's𒁃 management is being aggre▨ssive with inventory valuation. Finally, look for any inventory charges, as they can pinpoint inventory obsolescence problems.