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Sir could you please explain to me how quick ratio, inventory turnover ratio and inventory turnover period are related? I mean how do i interpret them all together interrelatedly??
Im confused after reading BPP text about it..
it would be be of great help of you could clear this to meThe inventory turnover ratio and the inventory turnover period are both effectively measuring the same thing. The turnover period is 365 divided by the turnover ratio (days). So as inventory increases the turnover ratio falls and the turnover period increases.
Neither of them is directly related to the quick ratio because it excludes inventory.
Have you watched my free lectures on these ratios? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Yes Sir I have listened to all your lectures.
This is what made me confused, I can’t process this, can you elaborate, pleaasee??
”The quick ratio should ideally be at least 1 for companies with a slow inventory turnover. For companies with a fast inventory turnover, a quick ratio can be less than 1 without suggesting that the company is in cash flow difficulties. ”We want the current ratio to be more than 1 because if it is below 1 then they are not going to be able to pay their liabilities.
With the quick ratio we leave out inventories because the cash from selling inventories will take longer to get (they need to sell the inventory, then they need to collect from receivables, and the two together will be longer than the time they will have to pay their payables).
However if there is fast inventory turnover then it means that they will be selling the inventory quickly and so they will be able to get the cash in time to pay the payables.
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