Accounting / July 18, 2018 / Khloe Santiago
The Inventory Turnover and Days' Inventory Ratios measure the firm's management of its Inventory. In general, a higher Inventory Turnover Ratio is indicative of better performance since this indicates that the firm's inventories are being sold more quickly. However, if the ratio is too high then the firm may be losing sales to competitors due to inventory shortages. The Inventory Turnover Ratio is calculated by dividing Cost of Goods Sold by Inventory. When comparing one firms's Inventory Turnover ratio with that of another firm it is important to consider the inventory valuation methid used by the firms.
For example, assume ABC Corp has a return on investment of $1,000,000, an interest expense of $2,000,000 and average earning assets of $10,000,000. ABC Corp's net interest margin would then be -10%. This reflects the fact that ABC Corp has lost more money due to interest expenses than it's earned from investments. In this case, ABC Corp would have fared better had it used the investment funds to pay off debts rather than to make this investment.
Bankers use different cash flow measures for different purposes. Free cash flow is a common measure used typically for DCF valuation. However, free cash flow has no definitive definition and can be calculated and used in different ways.
Net interest margin is typically used for a bank or investment firm that invests depositors' money, allowing for an interest margin between what is paid to the bank’s client and what is made from the borrower of the funds.
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