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Monday, July 11, 2011

Finance and Management - 8

In the earlier blog, we looked at how an investor would look at the cash available in the balance sheet of a company and form an opinion. In today's blog we would look at the inventory heading.

Inventories are finished goods that haven't yet been sold. An investor would be watchful to see if a lot of the company's money is tied up in its inventory. While inventory gives a cushion against any industrial relations problem to a certain extent, or could act as a part of the company's prize war with another company; the investor would look as from an angle that says the money is locked up in inventory.

Companies have very little money to invest in inventory, if a lot of inventory is being piled up, and sales are low, it indicates that the company is building up for serious trouble. The longer it takes to make a sale, the longer the inventory would be with the company hence locking up the capital (money) flow. The issue might grow up to such an extent that the company might find it hard to pay off its suppliers in time!

How many iterations the inventory would take up within a year is measured by "inventory turnover". This is measured as the total cost of goods sold divided by the average inventory. The Inventory Turnover measures how quickly the company is moving merchandise through warehouse to customers. If inventory grows faster than sale, it is almost always an indication of a fundamental mismatch.

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