Financial analysts use financial ratios and trends in data to forecast company performance. They use one of these ratios, inventory to total assets, to assess operational management and inventory turnover. In general, a low inventory to total assets ratio is indicative of good performance and profitability.
Annual Report
The company's annual report is the source of a broad range of information about its performance, including cash flow, income and expenses and assets and liabilities. A firm's total assets, as well as its inventory, are found on its balance sheet, an important element of the annual report.
Balance Sheet
The balance sheet has three different sections: assets, liabilities and stockholder equity. Assets are divided between long-term and current assets, which are those assets that will be used in the coming year, and which include inventory. The balance sheet also records total assets.
Working Capital
Inventory is considered to be working capital; that is, inventory is capital that is currently generating revenue for the company. Companies with high inventory turnover traditionally have a low percentage of inventory to total assets. For instance, a company with $1,000 in inventory and total assets of $10,000 has 10 percent of its assets tied up in inventory ($1,000 divided by $10,000 equals .10).
Interpretaion
Analysts make judgments about a company's management, competitiveness and profitability based on trends in the inventory to assets ratio. If the ratio is rising, inventory levels are increasing, which may be a sign of low demand and over supply of the inventoried asset. Analysts consider this a negative sign. Conversely, if the ratio is decreasing, it may be a sign of increased demand which points to a higher level of profitability.