Another ratio worth to calculating is the stock turnover period, or stock days. This is another estimated figure, obtainable from publish accounts, which indicates the average number of days that items of stock are held for. As with the average debt collection period, however, it is only an approximate estimated figure, but one which should be reliable enough for comparing changes year on year.
The number of stock turnover days = (Stock / Cost of sales) X 365
The reciprocal of the fraction:
Cost of sales/stock
Is termed the stock turnover, and is another measure of how vigorously a business is trading. A lengthening stock turnover period from one year to the next indicates:
- A slowdown in trading
- A build-up in stock levels, perhaps suggesting that the investment in stocks is becoming excessive
Presumably if we add together the stock days and the debtor’s days, this should give us an indication of how soon stocks are convertible into cash. Both debtor’s days and stock days therefore give us a further indication of the company’s liquidity.