Stock turnover

Stock turnover measures how well a company coverts stock into revenues. It is closely similar to asset turnover and is also a measure of efficiency. It is:

annual sales ÷ stocks

Stock turnover is more specific than asset turnover. It measures how well the company is making use of the part of its working capital that has been invested in stock.

Stock turnover is the main component of asset turnover for companies that have little tied up in fixed assets but hold large amounts of stock, usually trading rather than manufacturing companies. For more capital intensive businesses fixed asset turnover becomes more important.

Stock days

Stock days measures the same thing as stock turnover, but is calculated in a way that puts it on a more similar basis to debtor days and creditor days:

(stocks ÷ cost of sales) × 365

Sales can be used as a proxy for cost of sales where gross margins are low, as with creditor days.

Stock days is a useful number largely because it makes it easier to see how changes in stock days, debtor days and creditor days combine to change the working capital ratio.

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