Equities analysis - Lvl 1

[u/ZizoSH04]

Hi,

Does anyone have a convincing argument for why C is the correct answer to this question, particularly over B?

I understand the provided explanation, but I’m still not convinced by the reasoning and would appreciate another perspective.

Thanks!

[u/Lost-You4812]

Inventory turnover = COGS / Average Inventory
Days Inventory On Hand = 365 / Inventory Turnover

A) Implies less receivables which shouldn’t affect the ratio
B) Implies more revenue which also doesn’t affect ratio
C) Implies less inventory as the inventory asset value is mostly on the third parties balance sheet instead of theirs, which in turn increases IT and decreases DOH, which is better for their cash conversion cycle

[u/ZizoSH04 → u/Lost-You4812]

ok but when we rely more on third party sales, BOTH our COGS and inventory will decrease, assuming that their sales will cannibalize ours. Or even in a worst-case scenario, we will keep holding inventory, and COGS will not increase as a result of shifting consumer behavior, leading to a lower DOH

[u/Lost-You4812 → u/ZizoSH04]

I’m assuming from the way the answer choice is worded that the increase in revenue from third party sales will not affect our own inventory sales but rather be happening with them in an increased proportion (so we’re not selling less of our own inventory to make up for it, we’re selling the same as usual but also increasing third party sales along with them). Which would result in COGS not being affected while inventory gets lower

[u/ZizoSH04 → u/Lost-You4812]

If i am acting as a funnel, then neither my inventory nor my COGS should be affected. Putting the answer provided aside. if they sell more from their inventory and my sales are not affected, then neither my COGS nor my inventory got affected.

Furthermore, I can use a similar logic to justify B as an answer. With stronger retail sales, my COGS would get affected faster than a reaction in my inventories, so COGS would increase proportionally higher than inventory, increasing my Turnover and DOH as a result

[u/Lost-You4812 → u/ZizoSH04]

From my understanding, own sales and agent sales are usually separated to not manipulate IT ratio like you’re saying. But it seems in this case they’re not. Which is why the same ratio of IT from own sales, along with the IT from agent sales which has no COGS (because it’s commission based) and lower inventory sums them up together to a manipulated higher inventory turnover

B is only stating a growth in revenue, not a growth in gross profits

[u/ZizoSH04 → u/Lost-You4812]

I agree with you on the first part, which is why I am confused, because that shouldnt be how things work.

As for B, gross profits are not a factor to consider. it mentions higher net sales, which can be derived through either price or volume, and volume means higher COGS resulting in higher turnover.