Chapter 6 Inventory analysis:
We frequently need more than one number to analyze an aspect of a company. In this case we want to analyze a company’s core profit earning potential. The gross
margin rate matters a great deal, but so does how often a company makes sales happen. Many low profit sales might do just as well as few high profit sales. In this
case we add the inventory velocity measures of inventory turns and days in inventory to better understand the effectiveness of our pricing strategy and core
profitability performance.
Companies that stock and sell products must work to keep their inventory selling quickly to minimize storage costs and obsolescence costs. Remember too that any
assets, like inventory, have to be funded by either liabilities and/or equity and those sources of capital expect a return on their investment. Holding inventory is
expensive. Service firms and other non-inventory firms have inherent efficiency advantages over traditional hard-goods firms, and those advantages will come out in
your analysis of these tools. Key tools at hand are gross profit percentage, inventory turnover rate, and number of days in inventory. I will continue evaluating the
Harley Davidson company (ticker: HOG) using www.yahoo.com/finance. Use any site you like for your company.
Inventory turns and days in inventory
You will need both the income statement and the balance sheet to source your numbers. Grab the Cost of Goods sold number you already found from the income statement:
