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I am doing some tutorial questions on financial ratios and would appreciate some help regarding the following:

I am given a few selected options on ratios to determine my answer -

Liquidity - Current ratio/ fixed ratio

Asset management - Inventory turnover, average collection period, total asset turnover

Debt Management - Debt Ratio, Times Interest Earned

Profitability - Gross Profit Margin, Operating Profit Margin, Net Profit Margin

Market value ratios - Price Earnings, Market to book ratio

The question is asking which ratios stated may suggest/be related to inventory levels

Other than inventory turnover ratio, which other ratios may showcase this information? I am unsure whether Average collection period a.k.a Days sales outstanding (DSO) may be related to inventory levels, same too for Total Asset turnover

How do I move on from here and if DSO is related, what can I explain about it?

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Total assets turnover is a superset of inventory turnover. Therefore, in my opinion it is related to inventory the same way inventory turnover is, except that it captures additional "noise" with regards to inventory.

All profitability ratios mentioned would be impacted by high inventory levels if there are variable costs to inventory storage, although this might be a stretch because for a lot of businesses storage would be a fixed cost (i.e. if your warehouse costs X$/month, there isn't really an additional cost whether you store 1 unit or 10,000 units, this may not be true if you must refrigerate or if inventory may spoil, etc.).

DSO relates to client payment, so it isn't related to inventory levels.

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  • Hi, could you elaborate what you meant by "noise"? – JJ Lin Oct 6 '20 at 11:24
  • @JJLin variability attributed to factors others than the one you are trying to measure. In this case, this would simply be assets other than inventory – ApplePie Oct 6 '20 at 13:13

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