CFA CFA Level 1 Inventory/Sales Ratio

Inventory/Sales Ratio

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    • GraemeA
      Participant
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      Good Day Everyone,

      This indicator has always given me trouble. May someone please explain it to me with reference to the business cycle stage that it indicates? E.g If inventory/sales is rising/ falling, what stage of the business cycle is the economy in?

      Thanks in advance.

      Graeme

    • Sophie Macon
      Keymaster
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      Hi @GraemeA – welcome!

      It’s a good question, as I can see how it can be interpreted both ways.

      Case 1: Rising inventories may indicate that companies are bullish about future sales, hence they are stocking up right now voluntarily. This would normally be in the expansion phase of the business cycle where economic growth is bullish.

      Case 2: On the other hand, rising inventories may indicate that companies are not selling as much as expected and hence accumulating stock involuntarily. This typically occurs at the start of contraction phase where the economy is slowing down.

      For this ratio, it depends on whether the high level is voluntary or not. If it’s Case 1 it’s a predictor of growth, and if it’s Case 2 it’s a predictor of a slowdown.

      Hope this helps!

    • GraemeA
      Participant
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      Yes it does… Thank you Sophie

    • Sophie Macon
      Keymaster
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      No probs @GraemeA – good luck!

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