Inventory is a key metric for stocks, and average inventory is just as important. It helps investors determine the average number of goods or products that a company owns at any given time. Average inventory provides an indication of how well a company is managing its supply chain and can be used to gauge the future performance of the company's stock. In this guide, we'll explain average inventory and how to calculate it with practical examples.
What is average inventory, and why is it important to calculate it for stocks?
Average inventory measures the average stock level or amount of goods a business owns at any given time. The average inventory calculation can be used to calculate the average cost of goods sold in relation to average sales volumes, helping investors determine company performance over a given period. This metric also provides an indication of how well the company manages its supply chain, allowing investors to make better-informed decisions.
Generally, companies with lower average inventory ratios relative to their sales volume (i.e., average inventory turnover) tend to perform better than those with higher average inventory ratios, as the former's efficiency in managing their supply chains is usually much better.
At the same time, this leads to lower inventory costs and higher cash flows as average inventory ratios decrease.
Average inventory formula
The average inventory formula is calculated by adding the starting and ending inventories together and dividing by two.
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
For example, if a company has an opening inventory of $500 and a closing inventory of $600, then the average inventory can be calculated as follows:
Average Inventory = ($500 + $600) / 2
Average Inventory = $550
This would indicate that the company's average inventory is $550.
If you want to calculate this automatically on Excel or Google Sheets, you can use the Wisesheets add-on like this:
How to analyze a stock's average inventory?
When gauging average inventory for stocks, investors should look at the average inventory turnover ratio. This is calculated by dividing sales revenue by average inventory and indicates how quickly a company's inventory moves through its system. A higher average inventory turnover ratio indicates that the company is managing its supply chain well and can sell off faster than average.
The key aspect here is average which refers to the industry turnover ratios. You will learn how to calculate individual turnover ratios and multiple companies below.
Average inventory calculation example
In 2022, Apple Inc. had an average inventory of $5.763 billion and sales revenue of $394.328 billion. The average inventory turnover ratio can be calculated as follows:
Average Inventory Turnover Ratio = Sales Revenue/Average Inventory
Average Inventory Turnover Ratio = $394.328 billion/$5.763 billion = 68.42
This results in an average inventory turnover ratio of 68.42 times.
When compared with stocks in the same industry using Wisesheets, you can quickly find that Apple Inc. is efficiently managing its supply chain and selling off faster than average, which is a positive sign for investors.
In conclusion, average inventory is an important metric to calculate when investing in stocks. It helps investors determine the average amount of goods or products that a company owns at any given time and gives an indication of how well it is managing its supply chain. It is calculated by adding the starting and ending inventories together and dividing by two. While the the average inventory turnover ratio is calculated by dividing sales revenue by the average inventory.
Comparing average inventory and average inventory turnover ratios with stocks in the same industry can help investors make better-informed decisions when investing in a particular stock, allowing them to maximize their return on investment.
To your investment success!