Normalized inventory change rate
factor.formula
Normalized inventory change rate =
Where, average total assets =
The formula calculates the difference in inventory levels between the most recent reporting period (period t) and the same period last year (period t-1) and normalizes it using the average total assets of the two periods to eliminate the impact of differences in company size.
- :
Inventory amount in the most recent reporting period (period t)
- :
Inventory amount in the same period of the previous year (period t-1)
- :
Total assets amount in the most recent reporting period (period t)
- :
Total assets in the same period of the previous year (period t-1)
factor.explanation
This factor is based on the research of Thomas, Jacob K., and Huai Zhang (2002), who found that there is a correlation between changes in inventory and the company's future performance. Specifically, an increase in inventory is usually interpreted as a company's optimistic expectations for future demand, but it may also indicate inventory backlogs and sales difficulties, so the company's performance may reverse after an increase in inventory. Conversely, a decrease in inventory may reflect a decline in demand or active destocking of the company, which will also affect the company's future profitability and growth, and may reverse. Therefore, this factor can be used as a signal to identify possible changes in the company's fundamentals and used in combination with other factors to construct quantitative investment strategies.