What Is Inventory Conversion? – ValueWalk Premium
John Griffin

What Is Inventory Conversion?

The post was originally published here.

Q1 2021 hedge fund letters, conferences and more

John Griffin

Definition of Inventory Conversion Period

  • The inventory conversion period is the timeframe that encompasses the process of obtaining the raw materials, manufacturing, to selling the product.
  • It helps the firms estimate the timespan between the day raw materials are bought to the day the product is sold.
  • The ideal inventory conversion ratio differs between industries.

What is the Formula for Inventory Conversion?

  • To calculate the inventory conversion period, divide the average inventory by cost of goods sold per day.

Inventory conversion period = inventory/cost of goods sold per day

 Inventory Conversion in Practice

  • If the average inventory of Walter pharmacy is $800 and the annual cost of goods sold is $146,000. What is the inventory conversion period of Walter’s pharmacy?
  • As the cost of goods sold is given in years, it has to be converted into days. So $146,000/ 365 days = $400 per day.
  • Now the information can be plugged in the formula:
    • $800/ $400 = 2 days
  • In conclusion, Walter pharmacy can purchase raw material, manufacture, and sell the products, all within two days.

Join the Bootcamp for Valuation!

The Valuation Master Class is the complete, proven, step-by-step course to guide you from novice to valuation expert.

Save with coupon code: get-smarter

Click here to learn more and register.

Article by Become A Better Investor

Saved Articles