Which ratio can provide an indication of the salability of a company's products?

• A. Gross Profit Margin
• B. Current Ratio
• C. Debt-to-Equity Ratio
• D. Inventory Turnover Ratio

Answer: (D)

Verified step by step guidance

1. Understand the concept of the Inventory Turnover Ratio: This ratio measures how efficiently a company sells and replaces its inventory over a specific period. It provides insight into the salability of a company's products.
2. Learn the formula for Inventory Turnover Ratio: The formula is \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \). This helps determine how many times inventory is sold and replaced during a period.
3. Identify the components needed: To calculate the Inventory Turnover Ratio, you need the Cost of Goods Sold (COGS) from the income statement and the Average Inventory, which is typically calculated as \( \text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} \).
4. Interpret the result: A higher Inventory Turnover Ratio indicates that the company is selling its inventory quickly, which is a positive sign of product salability. Conversely, a lower ratio may suggest slow-moving inventory or potential issues with product demand.
5. Compare with industry benchmarks: To fully understand the salability of a company's products, compare the calculated Inventory Turnover Ratio with industry averages or competitors' ratios to assess relative performance.