The inventory to sales ratio (ISR) is as it implies; it is the ratio of the average inventory value to annual sales; the inverse of inventory turns.
Example Inventory to Sales Ratios
”r;Let’s suppose you play the stock market. And you’re trying to decide between this list of companies to invest in. And this is the only thing you know about these companies is their inventory as a percentage of sales. Which one would you invest in? All things being equal and with no other knowledge we would invest in Singer. They have the most flexible cost structure.
”r;A lot of these numbers are just derivatives of one another. So you may be asking why are we going through all these derivatives? Well, in my experience, if you can present the metrics back to the organization in a way that they’re used to seeing metrics, it helps them start with a familiar frame of reference. So if the company is used to seeing their performance in transportation as a percent of sales, or manufacturing cost as a percent of sales, it’s helpful for them to see their inventory performance as a percent of sales. If they’re used to seeing things as return on assets, then you may develop a metric called Return on Inventory Investment. You try to present the results in a format or language that people are used to seeing things in.”