No. of Recommendations: 0
Dear Karen,

I have seen both definitions :) As you said though, it seems like yours seems to appear more in accounting texts. I am inclined to agree with yours though. Doubling the price of goods does not affect how fast stuff sells, but does double TMFRunkle's definition of inventory turnover.

Furthermore, defined in your fashion, inventory turnover = 365/(days in inventory), with the latter quantity defined at

http://www.fool.com/portfolios/rulemaker/1999/rulemaker991102.htm

Also, I do not understand the "fixed cost, variable cost" argument that TMFRunkle presents.

I have seen TMFRunkle's definition appear, for example, when one compares "inventory turnover" to "asset turnover". The latter uses sales, and fits nicely into the return on equity "duPont decomposition":

return on equity = income/equity
= (income/sales)*(sales/assets)*(assets/equity)
= profit margin * asset turnover * leverage

IMHO just define exactly what you mean by "inventory turnover", and keep in mind that it is just one of many pieces of data for a company.

Best,

Lleweilun Smith
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.