VALUATION AND

INVENTORY ANALYSIS
OF A COMPANY 2
WEEK 7
www.sarmaaya.pk
Learning Objective

• Understand the Inventory Ratios

• Understand Importance of Cash Conversion Cycle

www.sarmaaya.pk
01 INVENTORY TURNOVER RATIO

• The Inventory Turnover Ratio is the number of times an inventory is sold

or used in a time period such as a year. It shows how quickly a company
uses its supply of goods over a given period

• Inventory Turnover differs for different industries with some industries

having faster turnover of their inventories, while others are slow. It is
advised for the investor to look at inventory turnover of the company
relatively.
Cost of Goods Sold
Average Inventory

Average Inventory = Inventory at End + Inventory at Start

2

www.sarmaaya.pk
 INVENTORY TURNOVER RATIO
TTM 2021 2020 2019 2018 2017

COGS 12 million 10 million 12 million 8 million 6 million 4 million

Inventory 9.5 million 9 million 8 million 8 million 7 million 5 million

Average Inventory 9.25 million 8.5 million 8 million 7.5 million 6 million

Inventory Turnover Ratio 1.3 1.18 1 1.06 1

ITR 3Yr Average 1.16

ITR 5Yr Average 1.10

 INVENTORY TURNOVER RATIO

3 Yr Average more than 5 Yr Average Good

3 Yr Average less than 5 Yr Average Bad

 INVENTORY TURNOVER RATIO
TTM 2021 2020 2019 2018 2017

COGS 12 million 10 million 12 million 8 million 6 million 4 million

Inventory 9.5 million 9 million 8 million 8 million 7 million 5 million

Average Inventory 9.25 million 8.5 million 8 million 7.5 million 6 million

Inventory Turnover Ratio 1.3 1.18 1 1.06 1

ITR 3Yr Average 1.16 Greater Good

ITR 5Yr Average 1.10

 02 DAYS RECEIVABLE OUTSTANDING

• Days of Receivable Outstanding is the number of days it takes for a

company to receive its payments from clients

• Lower the receivables days, the better

Average Receivables
x 365
Total Revenue

www.sarmaaya.pk
 DAYS RECEIVABLE OUTSTANDING
TTM 2021 2020 2019 2018 2017

Accounts Receivables 5 million 4.5 million 4 million 3 million 2.5 million 2 million

Average Receivables 4.75 million 4.25 million 3.5 million 2.75 million 2.25 million

Sales 24 million 20 million 20 million 17 million 14 million 10 million

Days of Receivables
72 Days 78 Days 64 Days 59 Days 59 Days
Outstanding

DRO 3Yr Average 71 Days

DRO 5Yr Average 66 Days

 DAYS RECEIVABLE OUTSTANDING

3 Yr Average less than 5 Yr Average Good

3 Yr Average more than 5 Yr Average Bad

 DAYS RECEIVABLE OUTSTANDING
TTM 2021 2020 2019 2018 2017

Accounts Receivables 5 million 4.5 million 4 million 3 million 2.5 million 2 million

Average Receivables 4.75 million 4.25 million 3.5 million 2.75 million 2.25 million

Sales 24 million 20 million 20 million 17 million 14 million 10 million

Days of Receivables
72 Days 78 Days 64 Days 59 Days 59 Days
Outstanding

DRO 3Yr Average 71 Days Greater Bad

DRO 5Yr Average 66 Days

 03 DAYS SALES OF INVENTORY

• Company’s Performance that gives investor an idea of how long a

company turns its inventory into Sales.

• The lower the value, the better

Average Inventory x 365

Cost of Goods Sold

www.sarmaaya.pk
 DAYS SALES OF INVENTORY
TTM 2021 2020 2019 2018 2017

Inventory 9.5 million 9 million 8 million 8 million 7 million 5 million

Average Inventory 9.25 million 8.5 million 8 million 7.5 million 6 million

COGS 12 million 10 million 12 million 8 million 6 million 4 million

Days Sales of Inventory 281 Days 310 Days 243 Days 342 Days 365 Days

DSI 3Yr Average 278 Days

DSI 5Yr Average 308 Days

 DAYS SALES OF INVENTORY

3 Yr Average less than 5 Yr Average Good

3 Yr Average more than 5 Yr Average Bad

 DAYS SALES OF INVENTORY
TTM 2021 2020 2019 2018 2017

Inventory 9.5 million 9 million 8 million 8 million 7 million 5 million

Average Inventory 9.25 million 8.5 million 8 million 7.5 million 6 million

COGS 12 million 10 million 12 million 8 million 6 million 4 million

Days Sales of Inventory 281 Days 310 Days 243 Days 342 Days 365 Days

DSI 3Yr Average 278 Days Lesser Good

DSI 5Yr Average 308 Days

 04 DAYS PAYABLE OUTSTANDING

• Days Payable Outstanding is the number of days a company takes to pay its
vendors or trade creditors

• The longer the days, the better for the company as it will take more days to
pay its creditors. However, we have to keep in mind, if average time keeps
on increasing to pay the vendors, this might create problems for the two
parties.

Average Accounts Payable x 365

Cost of Goods Sold

www.sarmaaya.pk
 DAYS PAYABLE OUTSTANDING
TTM 2021 2020 2019 2018 2017

Accounts Payable 4.5 million 4 million 3.5 million 2.5 million 2.5 million 2 million

Average Accounts
4.25 million 3.75 million 3 million 2.5 million 2.25 million
Payable

COGS 12 million 10 million 12 million 8 million 6 million 4 million

Days Payable
129 Days 137 Days 91 Days 114 Days 137 Days
Outstanding

DPO 3Yr Average 119 Days

DPO 5Yr Average 122 Days

 DAYS PAYABLE OUTSTANDING

3 Yr Average more than 5 Yr Average Good

3 Yr Average less than 5 Yr Average Bad

 DAYS PAYABLE OUTSTANDING
TTM 2021 2020 2019 2018 2017

Accounts Payable 4.5 million 4 million 3.5 million 2.5 million 2.5 million 2 million

Average Accounts
4.25 million 3.75 million 3 million 2.5 million 2.25 million
Payable

COGS 12 million 10 million 12 million 8 million 6 million 4 million

Days Payable
129 Days 137 Days 91 Days 114 Days 137 Days
Outstanding

DPO 3Yr Average 119 Days Lesser Bad

DPO 5Yr Average 122 Days

 05 CASH CONVERSION CYCLE

• The Cash conversion cycle is the best indicator to check how much days it
takes for the company to convert its inventory into sales, receiving cash
from customers and finally paying the cash to its vendors.

• Cash conversion cycle can be used to check the utilization of cash by the
company.
•
• The lesser the value, the better

Cash Conversion Cycle = Days Receivable Outstanding + Days Sales of

Inventory – Days Payable Outstanding

www.sarmaaya.pk
 CASH CONVERSION CYCLE
TTM 2021 2020 2019 2018 2017

Days of Receivables
72 Days 78 Days 64 Days 59 Days 59 Days
Outstanding

Days Sales of Inventory 281 Days 310 Days 243 Days 342 Days 365 Days

Days Payable
129 Days 137 Days 91 Days 114 Days 137 Days
Outstanding

Cash Conversion Cycle 224 Days 251 Days 216 Days 287 Days 287 Days

CCC 3Yr Average 230 Days

CCC 5Yr Average 253 Days

 CASH CONVERSION CYCLE

3 Yr Average less than 5 Yr Average Good

3 Yr Average more than 5 Yr Average Bad

 CASH CONVERSION CYCLE
TTM 2021 2020 2019 2018 2017

Days of Receivables
72 Days 78 Days 64 Days 59 Days 59 Days
Outstanding

Days Sales of Inventory 281 Days 310 Days 243 Days 342 Days 365 Days

Days Payable
129 Days 137 Days 91 Days 114 Days 137 Days
Outstanding

Cash Conversion Cycle 224 Days 251 Days 216 Days 287 Days 287 Days

CCC 3Yr Average 230 Days Lesser Good

CCC 5Yr Average 253 Days

INVENTORY FACTORS
Remarks
Inventory Turnover Ratio Good
Days Receivable Outstanding Bad

Days Sales of Inventory Good

Days Payable Outstanding Bad

Cash Conversion Cycle Good

INVENTORY FACTORS
Remarks

Good 3

Average 0

Bad 2
 SUMMARY

www.sarmaaya.pk
 SUMMARY (INVENTORY RATIOS)

01 Inventory Turnover Ratio. It is the measure of how quickly a company uses its
inventory
The Higher, the better

02 Days of Receivables Outstanding. This is the indicator to check the operating

performance of the company. Days of Receivables Outstanding are the
number of days it takes a company to receive cash from clients
The lower the days, the better

03 Days of Sales inventory. Days of Sales inventory tells us the number of days it
takes to convert inventory into sales.
The lower the days, the better

www.sarmaaya.pk
 SUMMARY (INVENTORY RATIOS)

04 Days of Payable Outstanding. It tells us how many days it takes for a company
to pay its vendors.
The Higher the days, the better
However, longer days it takes for a company may deteriorate the relations
between the two parties. .

05 Cash Conversion Cycle. The Cash conversion is the single best indicator to
check the utilization of cash by the company. It tells how much days it takes
for a company to generate sales from inventory, receive cash from clients and
pay the vendors. If the cash conversion cycle lowers with time, it is good for
the company and indirectly

www.sarmaaya.pk
THANK YOU
www.sarmaaya.pk