How do you justify falling inve to sales ratio to be a sign of higher growth , what i know is ratio keeps rising and expected to rise too when economy is growing. Solution definition , can someone explain?
I thought I read falling inventory to sales means the business owners are not confident they can sell inventory, so thats usually slower growth… but theres’s inventory on demand technology now which counters that?
sales is high while running inventory to be sold (dipping), resulted in higher denominator and lower numerator, hence a lower inv/sales ratio.
Paraphrased from CFAI text for my notes just moments ago: When inventory/sales ratio has moved down, the economy is likely to be strong in next few quarters as businesses try to rebuild inventory (the increase in production generates more overtime pay and employment which tends to boost the economy and bring further sales). When sharply up, economic weakness can be expected (businesses cut back production to try to reduce inventories and hires more slowly/possible layoffs).
It’s analysis of future quarters.
Thank you for this explanation, i did not have this perspective before for this ratio . Can you please give page number in CFA book so i can refer to it again later.
Volume 3, chapter 16, 4.1.1, page 52.