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Top-Performing Companies Move Their Wares Out The Door Fast.(B)(INVESTOR'S CORNER)
Byline: KATHARINE STALTER
IBD readers understand the importance of supply and demand. In this column, IBD frequently explains why details such as volume on the breakout day, number of shares outstanding, and stock splits can all affect the stock's performance.
But the concept of supply and demand can be applied to other areas of stock analysis.
For example, strong demand for a company's goods results in high sales. That strong demand can also help companies keep their inventory levels low. That boosts efficiency by minimizing the need to keep unsold wares on shelves.
Smart inventory control also reduces risk of write-downs for unsold goods, or the need to slash prices to move out sluggish sellers.
Top companies know how to keep merchandise moving quickly from factory to warehouse to store shelf to the customer. That efficiency is measured by a ratio called inventory turnover. The best firms tend to lead their peers in this measure.
The ratio is figured by dividing a firm's sales in the latest fiscal year by its average inventory, or the sum of inventories at the start of the year and the end of the year divided by 2. So if a company has $100 million in sales and $20 million in average inventory, has a turnover rate of 5.
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