Turnover ratios interpret different things for the company’s financial position. These ratios are also referred to as activity or asset management ratios and these show how efficiently the firm’s assets have been employed. The inventory turnover ratio measures how fast the inventory is moving through the firm and generating sales.
The ratio shows how well managed the inventory is and the higher the ratio the better the inventory is managed. But at times that is not true since a high inventory turnover might mean the inventory is low and that results in stock-outs and loss of sale and goodwill eventually. Due to this the averages of the values are used to calculate this ratio. Tesco’s inventory turnover ratio for 2005 was 23.89, 2006 was 24.89, 2007 was 20.41, 2008 was 17.97 and in 2009 it is 18.78 which is good. Since the company had a high rate in the earlier years and with the growing trend of the company with increasing profits and improving financial position it can be estimated that the high turnover rate might have been because of stock-outs and loss of sale thus to improve that the company reduced the turnover to an average and in 2009 it shows a good turnover which means now their inventory is managed effectively and efficiently.
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