Inventory to Sales Ratio

If the ratio rises then we expect to be confident about future sales as businesses are adding to their inventory levels. Therefore we expect healthy economy in future

Yet in the topic test it says:

If ratio declines (Sales rising) economy is likely to be strong as businesses rebuild inventory

Are these both not saying the same thing? What is the hard and fast rule on how to interpret the ratio, whether going up or down?

The ratio is inventory/sales… If sales increase then the denominator increases making the ratio decrease

If ratio is increasing, you are selling less and holding more in inventory. That’s a sign of slowing economy. Reverse is true when the ratio is decreasing.

What about companeis that increase inventory in anticipation of increased demand? This ratio makes no sense

I’ve seen questions approach this both ways as well and I can’t identify the rule of thumb. I guess we just need hope that the context of any exam questions make it clear how it should be interpreted.

Check out the practice questions on CFAI’s website. The first question under Economics pertains to this… it looks like CFAI’s stance is that if the ratio is shrinking then the economy is poised for growth. This contradicts Schweser’s material which states that a growing ratio indicates that the country is building up inventory in anticipation of growth.

Definitely default to CFAI - a shrinking ratio indicates growth.

yeah i agree. its reversed. decrease ratio = increase anticipaton of healthy economy.