Because inventory requires a significant financial investment and that investment involves significant ongoing costs, it is also important to measure the financial performance. Tracking the value of inventory is important for cash management purposes. However, an additional financial measure that often gets overlooked is stock turn ratio.
The stock turn is calculated by dividing the annual usage of the inventory (in dollars) by the value of inventory held (also in dollars).
Stock Turn = Annual Usage
For example, if a company holds $5M worth of inventory and issues $2.5M worth of that inventory in a year, the stock turn ratio is 2.5/5.0 = 0.5.
That is, the company turns over its inventory at the rate of one half per year. Obviously, the higher the stock turn ratio, the better.
Tip excerpted from Smart Inventory Solutions 2nd Edition by Phillip Slater
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