How fast does inventory and cash come back?

Asset turnover looks at the whole balance sheet at once. Two more focused turnover ratios zoom into the parts that most affect day-to-day cash: how quickly stock sells, and how quickly customers pay. Both connect straight back to the liquidity worries of unit two.

Inventory turnover: how fast stock moves

Inventory turnover = cost of goods sold ÷ average inventory. How many times a year the company sells through and replaces its entire stock.

• Turnover of 12 means inventory clears roughly once a month — brisk.
• Turnover of 2 means stock sits for about six months before selling — slow, and a risk if goods spoil, go out of fashion, or tie up cash.

Divide 365 by the turnover to get days inventory — the average time an item sits on the shelf. A turnover of 12 is about 30 days; a turnover of 2 is about 180 days.

Receivables turnover: how fast customers pay

Receivables turnover = revenue ÷ average accounts receivable. How many times a year the company collects its outstanding customer bills. Again, 365 ÷ turnover gives days sales outstanding — the average wait to get paid. Rising days outstanding means cash is arriving more slowly, which (remember unit two) can strangle a profitable company.

A worked example

An illustrative electronics retailer: cost of goods sold $80bn, average inventory $10bn → inventory turnover 8 (≈ 46 days on the shelf). Revenue $100bn, average receivables $5bn → receivables turnover 20 (≈ 18 days to collect). Read together: stock takes about six and a half weeks to sell and cash comes in about two and a half weeks after the sale — a fairly tight, cash-friendly cycle. Slow either one down and the same profitable business needs more cash to keep running.

Why these two travel together

Inventory days plus receivable days, minus the time the company itself takes to pay suppliers, is the cash conversion cycle — the number of days a business's cash is tied up before it comes back. Shorter is generally healthier: the company funds less of its own operation and has more room to grow without borrowing. It's efficiency and liquidity, measured as time.

In the data

Both ratios want an average balance, and a balance sheet only ever gives a snapshot on one date. Here are Apple's inventory and receivables at its latest year end:

To average, take two adjacent year ends and use the midpoint. A single year-end balance set against a full year of cost of revenue or sales understates turnover for a business whose balance sheet is growing, and overstates it for one that is shrinking. And "net receivables" is already net of the allowance for customers expected not to pay, so it is not the gross amount customers owe.

Try it now

The flows these ratios divide into, from the same fiscal year as the balances above:

1. Compute inventory turnover — cost of revenue ÷ inventory — and convert it to days with 365 ÷ turnover.
2. Compute receivables turnover — total revenue ÷ net receivables — and convert that to days too. Say in one clause what the "net" in that line has already removed, before you describe your answer as what customers owe.
3. Add the two day-counts. That is the operating cycle — stock on the shelf plus time to collect. Subtract the days the company takes to pay its own suppliers (use accounts payable against cost of revenue) and you have the cash conversion cycle, the one that says how long its cash is actually locked up.
4. Both ratios properly want an average balance, and the table above is a single snapshot. Fix it with the two most recent period ends:

Take the midpoint of each pair and recompute both day-counts. Compare against your first pair and note which direction they moved — the sign tells you whether this balance sheet is growing or shrinking, which you now know without being told.