Inventory Turnover The following financial data is from Hi-Tech Instruments\' fi

Question

Inventory Turnover
The following financial data is from Hi-Tech Instruments' financial statements (thousands of dollars, except earnings per share.)

(Thousands of Dollars)

Calculate the company's inventory turnover for 2016.

Round answer to one decimal place.

Answer

Compare the result to the industry average.

Hi-Tech Instruments' ratio is higher than the industry average.

Hi-Tech Instruments' ratio is lower than the industry average.

2016 Sales revenue $210,000 Cost of goods sold 132,000 Net income 8,300 Dividends 2,600 Earnings per share 4.15

Explanation / Answer

Inventory turnover ratio = COGS/Average inventory

=132000/{(46500+50700)/2}

=132000/48600

=2.7 times

While the average for inventory turonver is 3.5

Thus,

Hi-Tech Instruments' ratio is lower than the industry average.

Low turnover means you are not selling through products efficiently, you are buying too much inventory for demand or you are throwing out expired or perished products. These conditions often cause you to sell products at discounts to clear them out. Lower turnover can result from inventory buildup intended to meet pending spikes in demand. If you correctly predict pending sales growth, your ratio should improve in the next period.

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