Activity Measures, Inventory turnover ratio,Analysis of total assets turnover, Number of day’s sales in inventory:

Activity Measures

Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales. Mainly there are four types of activity measures; they are inventory turnover ratio, total assets turnover ratio, number of days sales in account receivable and number of day’s sales in inventory.

 Inventory turnover ratio:

Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low. A too high inventory means higher carrying costs and higher risk of stocks becoming obsolete whereas too low inventory may mean the loss of business opportunities. It is very essential to keep sufficient stock in business. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turnover ratio/Inventory turnover ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.

High inventory turnover/stock velocity indicates efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. A low inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over-investment in inventories, dull business, poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment. The inventory turnover ratio is also an index of profitability, where a high ratio signifies more profit; a low ratio signifies low profit.

Table: 1 showing inventory turnover ratio of Wall-Mart, Target and Costco over different year

Company/year	2005	2006	2007	2008
Wall-mart	-	9.97	10.47	10.88
Target	9.14	9.57	9.43	-
Costco	13.04	13.75	13.37	-

Looking at the figure above in table, Wall-Mart inventory turnover is increased over three years and in 2008 it reached to 10.88 which means, Wall-Mart sales its inventory around 11 times a year or it sales its entire inventory within 34 days. While comparing inventory among the three companies, it seems that Costco is best among three as they sales their inventory 13 to 14 times over a year but Costco inventory turnover ratio decreased during 2007 and 2008 which reflects some negative connotations. Target just sales its inventory around 9 to 10 time in a year or it takes 37 days to Target to sale its inventory. Therefore; from inventory turnover perspective Costco seems the best among three but Wall-Mart is good either.

Analysis of total assets turnover:

Total asset turnover measures a firm's efficiency at using its assets in generating sales or revenue the higher the number the better the firm’s financial position. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. This ratio indicates the relationship between assets and revenue. It is useful to determine the amount of sales that are generated from each dollar of assets. Companies in the retail industry would expect a very high turnover ratio - mainly because of cutthroat and competitive pricing.

Table: 2 showing total assets turnover ratios of Wall-Mart, Target, and Costco over different year

Company/year	2005	2006	2007	2008
Wall-mart	-	2.39	2.38	2.38
Target	1.52	1.6	1.50	-
Costco	3.27	3.45	3.4	-

In comparison among three, Costco has the highest assets turnover ratio which means that the Costco has highest amount of sales generated from each amount of dollar and the low profit margin which is the characteristics of competitive pricing in the retail industry. Costco represents the efficient generation of sales per dollar invested. On the other hand, Target has relatively low assets turnover which means they keep high margins in their sales. Wall-Mart total assets turnover is highly consistent which is equal to industry average. From the assets turnover ratio point of view Costco seems better choice for the investor.

Number of days sales in account receivable:

Accounts Receivables Turnover is a close cousin to the Inventory ratio. It can be used to determine whether the company is having trouble collecting on sales it provided customers on credit. To compute Accounts receivable turnover, we divide sales made on credit by average accounts receivable. A low number of days indicate that the company collects its outstanding receivables quickly. Typically, DSO is calculated monthly. The Days Sales Outstanding figure is an index of the relationship between outstanding receivables and sales achieved over a given period. The DSO analysis provides general information about the number of days on average that customers take to pay invoices.

Table: 3 showing Days sales in account receivables of Wall-Mart, Target and Costco over different year

Company/year	2005	2006	2007	2008
Wall-mart	-	3.14	2.77	3.56
Target	40.34	39.06	47.82	-
Costco	48.11	45.24	4.41	-

In our figure above, it seems that the Wall-Mart is high risk averse and Target and Costco are highly risky and it has trouble in collecting its receivable’s though the Costco’s 2007 day’s sales in account receivable is 4.41, their previous years receivables was due for more than 45 days which reflects uncertainty and inconsistency.  While comparing these three companies the wall- mart has the lowest number of day’s sales in account receivable which means that Wall-Mart has less amount on sales made in credit which is good for organization while Target has the highest sales in receivable.

Number of day’s sales in inventory:

Day’s sales in inventory provide an estimate of the number of days, on average, that it takes to sell inventory. The value of inventory in the ratio includes the value of work in progress. Average daily cost of sales is equal to total cost of sales divided by 365 (although other divisors may be used, for example, the number of working days in a year). A ratio value of say, 33 days, indicates that it takes, on average, 33 days to sell inventory. By itself, however, the ratio does not convey a lot of meaning. Comparison of the ratio provides more meaningful information.

Table: 4 showing day’s sales in inventory of Wall-Mart, Target and Costco over different year

Company/year	2005	2006	2007	2008
Wall-mart	-	49.44	46.55	44.82
Target	61.01	57.94	59.07	-
Costco	31.62	31.56	31.55	-

Looking at the table above, it seems that Costco is best among three companies because it just takes 31 to 32 days to Costco to sale its entire inventory. On the other hand, it takes around 60 days for Target to sale its inventory. Wall-Mart falls within industry average being second best option after Costco.

In conclusion, Costco is the best option for investor from activities measure stand points and Target is the worse among three in the industry. From consistency points of view, Wall-Mart is best as they are highly consistent in their past performance giving neck to neck competition.