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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Understanding Financial Statements Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Balance Sheet Analysis

 - Leverage and financial
   strength affect share value

 - Liquidity concerns can
   decimate a business

 - Cash is critical, to a point
    * Window Dressing
    * Cash Gap
    * Cash per Share
    * Burn Rate

 - Marketable Securities

 - Receivables are interwoven
    with cash flow
    * Past Dues and Write-offs
    * Receivables turnover ratios
    * Securitizations

 - Inventory - focus on the
   profit margins
    * Perpetual vs. Periodic
       Inventory
    * Inventory Accounting
       Calculation
    * Inventory Costing Methods
    * Lower of Cost of Market
    * Inventory Categories
    * Inventory Turnover Ratios

 - Fixed assets are necessary in
   order to be a world class
   company

 - Liabilities with equity attributes
   are enriching

 - Emphasizing debt net of cash
   can be misleading

 - Book value is a tool to
    properly evaluate a stock

 - Off-balance sheet assets and
   liabilities are legal

 

 


Inventory Turnover Ratios

Inventory has a holding cost associated with it. The holding cost is either the company’s borrowing cost rate, or its cost of capital rate. The faster inventory turns over and is converted into receivables, and then cash, the more efficient management is in deploying its resources. The inventory turnover ratio measures this efficiency, and is easily compared with competitors’ results.

The “inventory turnover ratio” is calculated by dividing annualized cost of goods sold by average inventory.

Another way to look at the efficiency of inventory management is to calculate “day’s sales in ending inventory.” This is computed by dividing the inventory turnover ratio into the number of days in the year, and is the inverse relationship of the inventory turnover ratio, expressed as number of days. This discloses the number of days it takes to sell your inventory. Either calculation should detect slow moving and possibly obsolete inventory. The faster the inventory turns over, the lower the holding cost.

There have also been major advances in the accuracy of audited inventories, as well as in identifying and reducing the amount of shrinkage in stores. Inventories may be bar coded; the counting/auditing companies, like RGIS, do a fantastic job of verifying inventories, especially in retail and grocery stores. The values reported on the balance sheet to investors have been greatly improved over the years, because of these inventory-auditing companies.  

The continuing trend towards outsourcing production capabilities is disturbing. Investors should be concerned if an organization can maintain its profit margins, if it can’t manufacture the products it sells. 

Click here for information on:
-Focus on the Profit Margins
-Perpetual vs. Periodic Inventory
-Inventory Accounting Calculation
-Inventory Costing Methods
-Lower of Cost or Market
-Inventory Categories

 

 

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