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Calculating inventory turnover

From: Excel 2007: Financial Analysis

Video: Calculating inventory turnover

Companies must walk a fine line between maintaining enough inventory to enable immediate sales, but without producing too many units that end up sitting in a warehouse unsold. Modern companies do their best to produce goods as needed on a just-in-time basis. So they limit their upfront investment and don't have unsold products sitting in a warehouse. The inventory turnover ratio indicates how well a company handles that problem. To calculate the inventory turnover ratio, you divide the cost of goods sold by the value of goods currently in inventory. So, I have those figures here. The cost of goods sold and the inventory, and to calculate the ratio, we divide B5, cost of goods sold, by B6, which is the inventory turnover ratio.

Calculating inventory turnover

Companies must walk a fine line between maintaining enough inventory to enable immediate sales, but without producing too many units that end up sitting in a warehouse unsold. Modern companies do their best to produce goods as needed on a just-in-time basis. So they limit their upfront investment and don't have unsold products sitting in a warehouse. The inventory turnover ratio indicates how well a company handles that problem. To calculate the inventory turnover ratio, you divide the cost of goods sold by the value of goods currently in inventory. So, I have those figures here. The cost of goods sold and the inventory, and to calculate the ratio, we divide B5, cost of goods sold, by B6, which is the inventory turnover ratio.

The inventory turnover ratio is a measure of how efficiently a company manages its production processes. One example of managing inventory is the book publishing industry. On a per unit basis, it is much less expensive to print 100,000 copies of a book than 10,000. So publishers will often order a huge run of books. So, half of them with the regular price, and offer the rest of the stores at a deep discount. This process called remaindering enables stores to purchase for $1 older books that might have been sold at a wholesale price of $10 when the book was still popular.

Selling the extra books at that deeply discounted price, removes the stock from the publisher's inventory, and improves the company's inventory turnover ratio. If you're thinking about investing in a manufacturing firm, you should compare its inventory turnover ratio to the industry average, and the ratio of other companies in the sector. A relatively high inventory turnover ratio indicates that goods are sitting in a warehouse, taking up space and depreciating.

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This video is part of

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Excel 2007: Financial Analysis

51 video lessons · 13637 viewers

Curt Frye
Author

 
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  1. 2m 6s
    1. Welcome
      1m 8s
    2. Using the exercise files
      32s
    3. Disclaimer
      26s
  2. 13m 20s
    1. Separating inputs and formulas
      2m 2s
    2. Avoiding common mistakes
      5m 39s
    3. Tracing formula precedents and dependents
      2m 52s
    4. Evaluating Excel formulas step by step
      2m 47s
  3. 18m 40s
    1. Tracking income and expenses using an Excel table
      3m 29s
    2. Creating a Pivot Table from table data
      3m 36s
    3. Pivoting a Pivot Table
      2m 22s
    4. Filtering a Pivot Table
      3m 11s
    5. Adding Pivot Table columns to enhance data analysis
      3m 5s
    6. Tracking cash flow using a Pivot Chart
      2m 57s
  4. 18m 48s
    1. Reading a corporate financial statement
      6m 1s
    2. Introducing common-sizing strategies for analyzing financial statements
      3m 59s
    3. Creating common-sized income statements
      3m 1s
    4. Creating common-sized balance sheets
      2m 53s
    5. Calculating percentage changes in financial statements
      2m 54s
  5. 8m 12s
    1. Calculating earnings per share
      1m 54s
    2. Calculating return on equity and return on assets
      2m 50s
    3. Calculating gross profit margin and net profit margin
      3m 28s
  6. 6m 19s
    1. Calculating the current ratio and quick ratio
      2m 47s
    2. Calculating the average collection period
      1m 56s
    3. Calculating inventory turnover
      1m 36s
  7. 6m 12s
    1. Calculating the equity ratio
      1m 26s
    2. Calculating the debt ratio
      2m 57s
    3. Calculating the times interest earned ratio
      1m 49s
  8. 10m 58s
    1. Calculating simple interest and compound interest
      3m 36s
    2. Applying nominal versus effective interest rates (APR versus APY)
      3m 21s
    3. Calculating the number of days between events
      4m 1s
  9. 13m 32s
    1. Computing the future value of an investment
      3m 30s
    2. Calculating present value
      2m 29s
    3. Calculating net present value
      2m 42s
    4. Calculating internal rate of return
      2m 24s
    5. Calculating NPV and IRR for uneven input periods (XNPV and XIRR)
      2m 27s
  10. 7m 30s
    1. Projecting future results using the Forecast function
      2m 9s
    2. Performing quick forecasts using the Fill handle
      2m 57s
    3. Adding a trendline to a chart
      2m 24s
  11. 22m 28s
    1. Introducing amortization
      2m 20s
    2. Calculating payments on a fully amortized loan
      2m 21s
    3. Calculating payments on a partially amortized loan (balloon payments)
      2m 4s
    4. Calculating interest and principal components of loan repayments
      5m 32s
    5. Introducing depreciation
      2m 1s
    6. Calculating straight line depreciation
      1m 30s
    7. Calculating declining balance depreciation
      3m 24s
    8. Calculating double declining balance depreciation
      3m 16s
  12. 9m 34s
    1. Introducing bonds and bond terminology
      1m 37s
    2. Calculating a bond's yield
      2m 15s
    3. Calculating the value of zero coupon bonds
      3m 18s
    4. Pricing bonds to be offered to investors
      2m 24s
  13. 23s
    1. Goodbye
      23s

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