The Impact of Gross Profit Margin on Inventory Turnover

Date of Award

Spring 5-2026

Degree Name

Bachelor of Science (BS)

Advisor(s)

James McCann

Abstract

Economic liberalization in the 1990s resulted in the hyperglobalization of international supply chains, fundamentally altering how operational variables relate to financial performance in American goods manufacturing. While existing research has generally found a negative correlation between inventory turnover and profitability in the American retail sector, studies on manufacturing firms of any kind are limited. This thesis examines the relationship between inventory turnover ratios and gross profit margins across five manufacturing sectors—automobile manufacturers, technology hardware and peripherals, construction machinery and heavy trucks, agricultural and farm machinery, and semiconductors—using WRDS Compustat financial data from 1980 to 2024. Panel regression models test both intra-firm and cross-firm correlations between inventory turnover and gross profit margin for 28 firms across these sectors. Sector-level intra-firm regressions reveal significant heterogeneity both within and across business sectors, with explanatory power varying dramatically by firm (ranging from an adjusted R2 of 0.800 to -0.002). Critically, time series analysis demonstrates that intra-firm correlations have maintained significant heterogeneity since the 1980s. Additional time series analysis demonstrates that cross-firm correlations have weakened since the 1980s, declining from an adjusted R2 of 0.310 in 1981 to -0.02 in 2024. These findings suggest that the traditional "earns turns tradeoff"—wherein higher gross profit margin correlates with lower inventory turnover—has lost substantial explanatory power for American goods manufacturers, potentially due to the expansion of globally optimized supply chains.

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