Question

Ratios	2016	2015	2014	2013
Profit margin	19%	17.8%	17.3%	19.9%
Gross Profit Margin	41.4%	38.5%	38.1%	38.8%
Current Ratio	1.4 : 1	3.3 : 1	1.5 : 1	1.6 : 1
Quick Ration	0.8 : 1	3 : 1	1.2 : 1	1.3 : 1
Working Capital (in millions)	$1,380.3	$6,692.6	$1,437.6	$1,880.1
Accounts Receivable Turnover (times per year)	17.8	20.1	21.7	20.9
Accounts Receivable Days Outstanding (days)	21.9	18.7	16.2	17.1
Inventory Turnover (times per year)	181.3	148.8	145.4	140.2
Days of Inventory (days)	2.0	2.5	2.5	2.6
Operation Cycle (days)	22.5	22.0	25.0	23.9
	Note 1	Note 1 & 2	Note 2	Note 3

Significant Observation:

There was a significant increase in Inventory Turnover from 2015 to 2016.

My question would be what would cause my signifcant obervation based on the sec 10-K reports any help would be great thanks.

2016 McDonald's Company Annual Report. (2016 SEC 10-K) (SEC Filing Date: 3/31/2017). Retrieved February 10, 2018, from https://www.sec.gov/Archives/edgar/data/63908/000006390817000017/mcd-12312016x10k.htm#s1A53D3CFBC595772B22DE6C28CEA0F55

Answer 1

Inventory Turnover ration can be calculated as = Cost of goods sold / Average inventory.

One can understand on the above formule that if cost of inventory increases then inventory turnover ration would increses. Inventory turnover ration is important because if incase entity purchases inventory in larger quanitites but not able to sell then the company has to incure the costs associstes with the inventory i.e carrying cost,wastge etc., it shows how effectively the entity is using its resource that is incase of larger quantites of inventory entity is spending more on inventory but not able to recover the amount by selling the same which leads to working capital arrangement problems,interest cost increases etc.,this measurement shows how easily an entity can turn its inventory into cash.

in the given case it can be observed that there is an consistent increase in inventory turnover ratio from last few years from this one can understand that entity investing more in the inventory where its working capital getting stuck, ineffective usage of funds, leads to incraese in interest cost and cost of captial. because of high inventory turnover ratio shareholder may not get good returns for their investments.