The Percentage of Inventory to Total Assets
Financial analysts use financial ratios as a way to analyze data. By finding trends in data, analysts are better able to forecast company performance. One ratio used to assess operational management and inventory turnover is inventory to total assets. In general, a low inventory to total assets ratio is indicative of good performance and profitability.
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Annual Report
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The annual report provides an overview of the company's performance from an asset, revenue and cash flow perspective; the income statement provides an overview of company earnings; the balance sheet provides an overview of company assets and liabilities; the cash flow statement provides an overview of the company's inflows and outflows of cash.
Balance Sheet
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The balance sheet has three different sections: assets, liabilities and stockholder equity. Assets are divided between current and long-term assets. Current assets are those assets that will be used in the coming year and inventory is classified as a current asset. The value of inventory can be found on the balance sheet. Total assets can also be found on the balance sheet.
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Working Capital
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Inventory is considered to be working capital; that is, inventory is capital that is currently generating revenue for the company. Companies with high inventory turnover traditionally have a low percentage of inventory to total assets. For instance, a company with $1,000 in inventory and total assets of $10,000 has 10 percent of their assets tied up in inventory ($1,000 divided by $10,000 equals .10).
Interpretaion
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By looking at the inventory to total assets ratio over time, analysts can determine inventory levels for the company. If the ratio is rising, inventory levels are increasing, which may be a sign of low demand and over supply of the inventoried asset. Analysts consider this a negative sign. Conversely, if inventory levels are decreasing, it may be a sign of increased demand which points to a higher level of profitability.
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