INVENTORY TURNOVER RATIO
 Inventory turnover ratio measures the company’s efficiency in managing its inventories.
 The inventory turnover ratio shows how effectively inventory is managed by comparing cost of
goods sold with average inventory for a period.
 Trading and manufacturing companies and companies that are dealing with highly perishable
products and those that are prone to technological obsolescence must pay close attention to
this ratio to minimize losses.
 This ratio is important because total turnover depends on two main components of
performance. The first component is stock purchasing. If larger amounts of inventory are
purchased during the year, the company will have to sell greater amounts of inventory to
improve its turnover. This ratio is important because total turnover depends on two main
components of performance. The first component is stock purchasing. If larger amounts of
inventory are purchased during the year, the company will have to sell greater amounts of
inventory to improve its turnover.
 Inventory Turnover Ratio =
360
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
 Days’ Inventories = 𝐼𝑇𝑅
 For manufacturing companies that may have three types of inventories - finished goods, work
in process, and raw materials inventories – all must be included in the computation.
ANALYSIS
 Inventory turnover is a measure of how efficiently a company can control its merchandise, so it
is important to have a high turn. This shows the company does not overspend by buying too
much inventory and wastes resources by storing non-salable inventory.
 Creditors are particularly interested in this because inventory is often put up as collateral for
loans. Banks want to know that this inventory will be easy to sell.
ACCOUNTS PAYABLE TURNOVER RATIO
 The accounts payable turnover ratio provides information regarding the rate by which trade
payable are paid.
 The accounts payable turnover ratio is a liquidity ratio that shows a company’s ability to pay off
its accounts payable by comparing net credit purchases to the average accounts payable during
a period.
 This ratio helps creditors analyze the liquidity of a company by gauging how easily a company
can pay off its current suppliers and vendors.
𝑇𝑜𝑡𝑎𝑙 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
 APTR = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
 APTR =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
𝑇𝑟𝑎𝑑𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
360
 Days’ Payable = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜
ANALYSIS
 Since the accounts payable turnover ratio indicates how quickly a company pays off its vendors,
it is used by supplies and creditors to help decide whether or not to grant credit to a business.
As with most liquidity ratios, a higher ratio is almost always more favorable than a lower ratio.
OPERATING CYCLE AND CASH CONVERSION CYLCLE
 The operating cycle covers the period from the time the merchandise is bought to the time the
proceeds from the sales are collected.
 For instance a retailer’s operating cycle would be the time between buying merchandise
inventory and selling the same inventory. A manufacturer’s operating cycle might start when the
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company spends money on raw manufacturing materials to make a product. The operating cycle
wouldn’t end until the products are produced and sold to retailers or wholesalers.
Most companies try to keep their operating cycles at a year or less. This means that it would
take a retailer an entire year to sell its inventory. Depending on the industry, this kind of an
inventory turn might be unacceptable.
Conversely, long operating cycle means that current assets are not being turned into cash very
quickly.
Companies with longer operating cycles often have to borrow from banks in order to pay short
term liabilities.
Operating Cycle = Days’ Inventories + Days’ Receivable
Cash Conversion Cycle = Operating Cycle – Days’ Payable
VERTICAL ANALYSIS
 Vertical analysis, also called common-size analysis, is a financial analysis tool that lists
each line item on the financial statements as a percentage of its total category.
 With vertical analysis, all accounts in the statement of financial position are presented
as a percentage of total assets while all accounts in the statement of profit or loss are
presented as a percentage of sales and revenue.
HORIZONTAL ANALYSIS
 Horizontal analysis, sometimes called trend analysis, is the process of comparing line items in
comparative financial statements or financial ratios across a number of years in an effort to
track the history and progress of a company’s performance.
 Peso Change = (𝑆𝑎𝑙𝑒𝑠2014 − 𝑆𝑎𝑙𝑒𝑠2013)