In this video, we delve into the concept of inventory efficiency ratios. We’ll explore two key metrics: inventory days and inventory turns. Inventory days measure the average time it takes a company to sell its inventory, while inventory turns indicate how frequently a company sells and replaces its inventory in a year.
To calculate inventory days, we divide the average inventory by the cost of goods sold per day. Average inventory is the mean of the beginning and ending inventory values. The cost of goods sold per day is obtained by dividing the annual cost of goods sold by 360.
Inventory turns, on the other hand, is calculated by dividing 360 by inventory days. A high inventory turnover ratio implies that a company is efficiently managing its inventory, selling it quickly and generating cash. Conversely, a low ratio may indicate overstocking or slow sales.
We’ll use Hasbro as an example to illustrate these concepts. Hasbro’s inventory days have increased to 85.3, indicating that it takes longer to sell its inventory. Additionally, its inventory turns have decreased to 4.2, suggesting a potential issue with inventory management. By comparing Hasbro’s ratios to industry peers, we can assess its performance and identify areas for improvement.