I/S ratio?

CFA Level III
#1

Hig Inventory to Sales ratio is good or bad for the economy?

#2

if ratio is low -> likly to be strong

if ratio is high -> weak eco

but,

don’t mix up the cycle with the ratio…

#3

bad

#4

If I/S is high because of increasing inventory it may be inventory buildup in anticipation of increase in sales. +ve. Moving out of recession.

If I/S is high because of decrease in sales it may be due to bad sales. -ve. Moving into recession.

#5

So that’s where I was getting at - It provides conflicting signals right?

#6

The relative change in the variables in I/S ratio is important.

If inventory remained same and sales dropped or inventory and sales both dropped and sales dropped more then it is -ve.

If sales remained same and inventory increased or if sales and inventory both increased and inventory increased more then +ve.

#7

Isn’t it the difference between the CYLCE and the RATIO?

When inventory cycle is in up-phase they build inventory and are confident to sell it, so their sales also increase…in my opinion these are two different things.

50 / 100 = 0.5

100 / 200 = 0.5

#8

That’s where I always get confused. Is the ratio high b/c the sales haven’t been strong (indicating decreasing consumer spending) or is it high b/c managers are forecasting higher sales and building up the inventory in anticipation?

#9

Increasing I/S ratio is a good thing. Inventories increase as confidence picks up, leading to increase in employment etc.

If you want a source, see Schweser book 2, page 101

#10

Again, read CFAI

A rising IS ratio indicates that inventories are ABOVE targets and the economy is likly to slow as firms reduce production to bring them back.

A falling IS ratio is positive idicator of growth as firms will likely increase production to rebuild depleted inventories.

#11

It is somewhat conflicting. CFA: “When the inventory/sales ratio has moved down, the economy is likely to be strong in the next few quarters as businesses try to rebuild inventory.” And yes, spanish, increasing I/S is good. CFA is just saying when it has fallen, it is likely to rise and the economy should do well… gambler’s fallacy in their own text