Inventory management ratio analysis of Ford and GM Essay

Inventory management ratio analysis of Ford and GM - Essay Example The inventory turnover ratio determines the management’s efficiency in converting the available inventory into sales. A low inventory turnover is a bad sign to a company’s performance since it indicates that the company’s products risk deteriorating. The company’s product will diminish in value due to overstaying in the stores. Due to this phenomenon, companies dealing with perishable goods usually have very high inventory turnover (Bull, 78). The average days to sell inventory is a financial measure that gives the willing investors an idea of the duration it takes for converting the available inventory into revenue. Therefore, a company’s performance ratio determines management efficiency in converting the stock into sales. In most scenarios a low average days to sell ratio is desirable. This ratio varies between industries. The average days to sell ratio is calculated as the total cost of inventory divided by cost of sales and the result got from the computation multiplied by 365 days. An average day to sell ratio forms one part of the cash conversion cycle. It represents the conversion raw material into cash. The day’s sales outstanding and the day’s payable outstanding are the other two stages in the cash conversion cycle. By determining how long a company holds on inventory before selling measures the company’s efficiency ratio. The ratio gives the average time it takes for a company’s cash to be tied up. The inventory turnover ratio of Ford is 15.9 times while that of GM is 10.0 times.