A higher inventory turnover ratio reflects positively on a company's ability to manage its inventory by selling it quickly and efficiently, which can lead to increased profits.
The statement is true. The inventory turnover ratio measures how quickly a company sells its inventory and replaces it with new stock. A higher ratio indicates that the company is efficiently managing its inventory by selling it quickly, which can lead to increased profits.
For example, let's say Company A and Company B both have an inventory turnover ratio of 5. This means that both companies sell and replace their inventory five times within a given period. However, if Company A has a higher inventory turnover ratio of 8, it suggests that they are selling and restocking their inventory more frequently and efficiently than Company B.
A higher inventory turnover ratio can also indicate that a company has the right amount of inventory, preventing excess stock from tying up capital or becoming obsolete. However, it's also important to consider industry norms and compare the ratio with competitors to gain a better perspective of a company's inventory management.