Inventory to Revenue determines the ability of a company to manage their inventory levels. It measures the percentage of Inventories the company currently has on hand to support the current amount of Revenue.
An increase in inventory to revenue ratio from one quarter to the next indicates that one of the following is happening:
1. investment in inventory is growing more rapidly than revenue
2. revenue are dropping
No matter which situation is causing the problem, an increase in the inventory to revenue ratio may signal an oncoming cash flow problem.
Likewise, a decrease in the inventory to revenue ratio from one quarter to next indicates that one of these is occurring:
1. investment in inventory is shrinking in relation to revenue
2. revenue are increasing
No matter which situation is causing the reduction in the inventory to revenue ratio, either one suggests that business's inventory levels and its cash flow are effectively managed.
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