Introduction
Inventory turnover, the ratio of a firm’s cost of goods sold to its average inventory level, is generally used to measure performance of inventory management, analyze short-term liquidity, and assess performance improvements over time. In general, a higher value of inventory turnover indicates better performance in controlling inventory levels. And a lower value may be an indication of over-stocking which may pose risk of obsolescence and increased inventory holding costs. Inventory Turnover=cost of good sold/average inventory
Average Inventory=(beginning inventory+ending inventory)/2 Gross profit percentage, the ratio of a firm’s gross profit to net sales, often used to judge operating profitability.The higher the gross profit percentage is, the healthier the business is. The gross profit percentage is a statement to measure how efficient the business is in making profit during the production process. Gross profit=revenue-cost of good sold
Gross profit percentage=gross profit/revenue*100% Industries with higher gross profit percentages tend to have lower inventory turnover, and those two figures are different for different industries. There are several factors affecting those two ratios in different industries. First, the products’ price.High prices lead to high gross profit percentage, on the other hand, high prices lower the demand and sales, thus decrease the inventory turnover. Second, length of products’ life cycle. Businesses which produce perishable goods usually have higher turnover compared to those dealing in durables. A shorter product life cycle implies rapid speeds of consuming as well as requirement of updating and changing products to better meet consumer needs, thus will result in high inventory turnover.
Hence a comparison would only be fair if it is made between companies of same industry. So we chose five