Accountancy Part BAccounting Ratios

A low stock turnover ratio indicates:

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → over investment in stock

Inventory turnover ratio = Cost of Revenue from Operations ÷ Average Inventory. A low ratio means the stock is sold slowly in relation to the quantity held, so too much money is lying in inventory, often because of bad buying or obsolete stock. It points to over-investment in stock.

Option (2) solvency position — Incorrect. Solvency is judged from the debt-equity, proprietary and interest coverage ratios, not from stock turnover.

Option (3) monopoly situation — Incorrect. Slow-moving stock says nothing about the firm being a monopoly.

Option (4) none of the above — Incorrect. Option (1) is what the low ratio indicates.

NCERT (2026-27 edition):
Inventory Turnover Ratio – “… Significance : It studies the frequency of conversion of inventory of finished goods into revenue from operations. It is also a measure of liquidity. It determines how many times inventory is purchased or replaced during a year. Low turnover of inventory may be due to bad buying, obsolete inventory, etc., and is a danger signal.”