To analyse stocks a little further it is possible to use ratio analysis. The STOCK TURNOVER RATIO shows how many times over the business has sold the value of its stocks during the year. It is calculated by:-
| STOCK TURNOVER RATIO = | Cost of goods sold Stocks |
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The higher the stock turnover the better, because money is then tied up for less time in stocks. A quicker stock turnover also means that the firm gets to make its profit on the stock quicker, and so the firm should be more competitive. However, it will vary between industries and so it is important to compare within an industry.
It is also possible to express the ratio as a number of days, which is sometimes an easier way to understand it. To do this use the following formula:-
| STOCK TURNOVER RATIO (in days) = | Average Stocks (Cost of goods sold/365) |
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The result of this ratio gives the "number of days that on average money is tied up in stocks". The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere. Since the stock is part of the working capital it is important that it is available for use promptly.
Sourch:
http://www.bized.co.uk
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