Inventory Conversion Ratio Analysis

Inventory Conversion Ratio indicates the additional amount of borrowing that is available upon the inventory being converted into receivable.

Formula:
Inventory Conversion Ratio = (Sales x 0.5) / Cost of sales
Inventory Conversion Period = 365 / Inventory Turnover Ratio

Example 1:
Company ABC has an Inventory Turnover of 8.5, and therefore the Inventory Conversion Period = 365 / 8.5 = 42.9 days

Example 2:
The following data relates to Robber plc: Total sales $80,000; Cost of Sales $50,000. Then the Inventory Conversion Ratio = (80,000 * 0.5) / 50,000 = 0.8

Example 3:
MV Ltd has the following data:
Stock at start $17,000
Stock at end $11,000
Total purchases $20,000
Purchase returns $2,000
Then,
Net purchases = Total purchases - Purchase returns = 20,000 - 2,000 = $18,000
Cost of goods sold = 17,000 + 18,000 - 11,000 = $24,000
Average inventory = (17,000 + 11,000) / 2 = $14,000
Inventory Turnover Ratio = Cost of goods sold / Average inventory = 24,000 / 14,000 = 1.7
Inventory Conversion Period = 365 / 1.7 = 214.7 days

* Next: Debt to Income Ratio Example
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