Average Stocks Period Concept
Average Stocks Period is an activity indicator that seeks to measure the efficiency level with which the company is managing its stock inventories. The bigger the average stocks period, lower is the stocks management efficiency.
Average stocks period is calculated by the division of the average amount of stocks by the total sales at a certain period of time. Given that the stock’s value is usually expressed to the cost prices, a more correct way to calculate the average stocks term is using the cost of merchandise sold and the materials consumed instead of the sales value. The indicator can then be converted in days, weeks or months, being enough for that to multiply the result obtained by 365, 52 or 12, accordingly (considering naturally that the considered period was one year).
An alternative to the average stocks period to measure the company’s efficiency in the management of its stocks inventories the stocks rotation ratio that can be interpreted as the number of times that stocks are converted in sales during a certain period of time.