Question

Research and compare the inventory turnover ratios of three large retailers: Wal-Mart, Home Depot and Canadian Tire using financial websites for all three, and compare the numbers from the same period 2015 - 2017 timeframe. What do these ratios tell you? Are you surprised at what you found?

Answer 1

Inventory

An inventory is basically an account of all goods, the company has in its stock weather it is in a raw material, a work-in-progress stock or in the form of finished goods. Inventory is considered to be a business asset which are ready to use or will be ready in a short span of time. It basically tells the asset the company is holding at a particular point of time.

There are basically three components/stages of Inventory:- One is the raw material stage, where in the goods are to be used in the production/manufacturing, it is in raw form work is to be done on it to make it useable by the ultimate customer, second is the work-in progress stage wherein the goods are in production, work has started and will be completed in a short span of time. Third is the last stage i.e the finished goods wherein the goods are ready to use by the ultimate consumer but still it is lying in the factory or warehouse and is ready to ship.

Inventory is considered to be the Current Asset of a company i.e the intention of a company to sale its inventory in an ordinary cours of business. Inventory basically tells the liquidity of a company i.e in the event of liquidation, a company would able to generate cash by solding its inventory, therefore it is considered to be a liquid asset i.e as good as cash.

Inventory Turnover Ratio

Inventory turnover is the number of times in the ordanary courseof business, the company sold and replaces its stock. It basically represents the sales efforts taken by the company, and how effectively it is managing its cost.

There are various methods to calculate the Inventory Turnver ratio such as:-

1. Cost of goods sold by the gompany divided by the Average Inventory? held, or
2. Marvet Value of sales i.e (Actual sale) divided by the closing stock of inventory i.e inventory held at the end of the year.

Average Selling period is calculated by dividing the total number of days in a year by he inventory turnover ratio, i.e on an average the company will take this much days to sell average inventotry, and an average inventory is calculated ny the opening inventory plus the closing inventory divided by 2.

The higher the inventory turnover ratio of the compay, the better it is because it tells the efforts taken by the compary in the ordary course of business, i.e how effectively it is able to attract the customers in the market and is capable to make sale more than the desired expectation. It basically tells that that the company is managing its stock very well. It also indicate that if the inventory turnover ratio is high as compared to the other companies then in that case it is also presumed that the demand of the product of that company is very high, threfore the company is able to make sale. It indicate the selling power of the company, it may be that sometimes due to promotional activities the sale increases but it indicate the overall effect, not only sale but corresponding cost also.

Wal-Mart's Inventory turnover Ratio as on Jan 31, 2015 was 8.09 times, where as on Jan 31, 2016 it was 8.12 times and as on Jan 31, 2017 it was 8.39 times. It clearly shows that the inventory turnover rationof Wal-Mart is increasing over the year, the demand of its products are good in market. Its selling efforts are clearly seen and is managing its cost effectively.

Home Depot's Inventory turnover ratio as on Jan 31, 2015 was 4.89 times as compared to that on Jan 31, 2016 4.93, which indicate that the is an increase in inventory turnovr ratio but not that much as it was expected. As on Jan 31, 2017 it was 4.96 times, it cleary shows that the inventory turnover ratio of Home Depot is increasing year by year but not effectively.

Canadian Tire's Inventory turnover ratio as on Jan 31, 2015 was 4.41 times and as on Jan 31, 2016 was 4.84 times which indicaes that company is making efforts to increase its sale in the market and as on Jan 31, 2017 its inventory turnover ratio was 5.16 times which means that over a period of time a company is able to sale or relace its stock 5.16 times, a little bit increase as compared to that of last year.

Yes I am totally surprised by analyising the inventory turnover ratio's of these three companies over the last three years, the market share of Wal-Mart is high as compared to Home Depot and Cnadian Tire, therefore the inventory turnover ratio of Wal-Mart is double that of the other two companies, there is a great demand for Wal-Mart products in the market, quality aslo matter a lot, i.e if customer are satisfied then only he will purchase aain and again and also the selling technique is also very much effective. No doubt the inventory turnover ratios are increasing, efforts are being made by the companies, but the share of Wal-Mart's product is hight as compared to the other two companies.