Efficiency and Turnaround time; The bloodpressure reading of a business

Here is a great real world example from Investopedia. This article breaks down Inventory Turnover. Use this as a framework tool to compliment Receivables Turnover Ratio. There are many other efficiency ratios we could discuss but these are 2 important ones I utilize frequently.

Let’s look at U.S. retail giant Wal-Mart, known for its super-efficient operations and state-of-the-art supply chain system which keeps inventories at a bare minimum. In fiscal 2003, inventory sat on its shelves for an average 45 days. Like most companies, Wal-Mart doesn’t provide inventory turnover numbers to investors, but they can be flushed out using data from Wal-Mart’s financial statements.

Inventory Days = 365 Days / (Average Cost of Goods Sold/Average Inventory)

Obtaining Average COGS To get the necessary data, find its ‘Consolidated Statements of Income’ on its website (see http://investor.walmartstores.com and look for the 2003 Annual Report) and locate cost of goods sold (COGS), or “cost of sales” found just below the top-line sales (revenue). For the 2003 fiscal year, Wal-Mart’s COGS totaled US$191.8 billion.

Obtaining Average Inventory Then look at the ‘Consolidated Balance Sheet’ (the next page after ‘Statements of Income’). Under assets, you will find the inventory figure. For 2003, Wal-Mart’s inventory was $25 billion, and in 2002, it was $22.7 billion. Average the two numbers ($25bn + $22.7bn / 2 = $23.9bn), then divide that inventory average for 2003, $23.9 billion, into the average cost of goods sold in 2003. You will arrive at the annual turnover ratio 8.0. Now, divide the number of days in the year, 365, by the annual turnover ratio, 8.0, and that gives you 45.3. That means it takes Wal-Mart just over 45 days, or about a month and a half, to cycle through its inventory.


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