Inventory to Sales Definition and Explanation

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Quick Definition

Determines the ability of a company to manage their inventory levels.

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Inventory to Sales Formula

Explanation of Inventory to Sales

The Inventory To Sales ratio measures the percentage of Inventories the company currently has on hand to support the current amount of Net Sales.

Importance of Inventory to Sales

An increasing Inventory To Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed. This often indicates larger financial problems the company may be facing.

Viewing this ratio over several periods reveals the important aspect of the company’s ability to manage Inventories while attempting to increase sales. It is also important to compare this ratio among several companies to gauge how well each one performs, and to compare their ratios to industry averages.