Question

Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?

Answer 1

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by Comparing cost of goods sold with average inventory for a period. Hence we can say that it simply measures how many times does the company sells it's average inventory in an year. In an grocery looking into inventory levels is important since it can show whether the costs are being controlled. It clearly shows how well a company generates sales from inventory. If the shop has a higher inventories it is good it means the shop is selling things very quickly and there is demand for their product. The number times the a shop is selling and replacing it's stock of goods during a period. Because in a grocery shop many things are of perishable nature whether there is demand if that or not is decided by the inventory turnover ratio. But in an insurance company the policies are not that perishable. In the grocery store chain it is important to see this that the goods are being sold and replaced if it not sold then manage the repurchase.