Balance Sheet - Inventories

Inventories are assets, generally the more assets a company has the better off it is but this is not strictly true.

Your inventory is the goods that you purchase to resell (if you are a retailer) or goods that you are in the process of constructing for sale (if you are a manufacturer). In addition, some service industries have time inventory. Inventory is an asset to you because you will eventually get benefit from it later, as you will receive cash when you sell it.

Inventory is usually recorded in the books at its cost to you. In the case of a manufacturer, this amount is the cost of all of the component parts plus the cost of labor and overhead attributable to those items that are in the process of construction and not yet sold.

 Investor should pay attention to large inventories for any business because it often create trouble of various kinds. Large amount of inventories consumes significant of company cash or even require substantial bank borrowings to finance it. Large inventories also increase the risk of suffering heavy losses in decline of commodity prices or the merchandise may be un-salable and become obsolete.

Inventory Turnover

Investor should learn how to use inventory turnover to measure the health of any company inventories level.

Investor should learn how to use inventory turnover to measure the health of any company inventories level. Inventory turnover is defined as the annual sales divided the inventory, to be more accurate, it should be divided by the cost of sales.

There is no standards point on inventory turnover and it vary widely for industry to industry, investor are highly recommended to studied year by year and compared to similar company running the same business before draw any conclusion for investment purposes.