1/13/2024 0 Comments High inventory turnover ratioA deeper look into the notes of the same is required because two companies may use a different inventory assumption so both need to be brought on the same page before comparing. Comparability of the ITR across a peer group can’t be executed by just taking the numbers out of the financial statements of these companies.This could lead to a higher ITR which in fact may be misleading For example, to reduce the tax payable, a company may prefer using LIFO assumption which would lead to recognizing a higher COGS in the income statement, in a rising price environment and also lead to a lower inventory on the balance sheet. Could be Manipulated: By using the inventory assumption of FIFO or LIFO as the case may be.The investors are not laypeople and if a company projects a very high ITR as compared to the peers, then that is an indication of foul play. However, this doesn’t mean that it is a duping mechanism. This, in turn, leads to gaining a comparative advantage in the industry because once investors are convinced, it is very hard for them to switch to another quickly. Attract investors: This is a key metric that is presented to the prospective investors so that they can make a sound investing decision.This helps in executing the planning in a better manner that gives higher results. Forecasting: It can be used to monitor whether or not a company will meet its budgeted target as it can help in monitoring the during-the-year ratio and help in formulating strategies for the residual year to achieve the desired results.It could also signal that market research is in order to review the competitive landscape because there might be a better product in the market launched by a competitor that has captured some of the company’s market.Īdvantages and Disadvantages of Inventory Turnover Ratioīelow are the points on the Advantages and disadvantages: Advantages Time Series Analysis: If the company’s ITR suddenly starts to decline, it could tell that the company needs to upgrade its product line or range because the consumers are not buying the product as they were before.A lower ratio would tell that the company is not doing something right and can help in identifying why the profits of the company are lower than expected.
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