Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over a period.

What is Inventory Turnover?

Inventory turnover is a financial ratio that measures the efficiency of a company in managing its inventory levels. It is calculated by dividing the cost of goods sold by the average inventory during a specific period. A high inventory turnover ratio indicates that a company is selling its products quickly and efficiently, which is typically seen as a positive sign of strong performance. On the other hand, a low inventory turnover ratio suggests that a company may be holding onto excess inventory or facing difficulties in selling its products. By analyzing the inventory turnover ratio, businesses can assess how well they are managing their inventory levels and making effective use of their resources. A higher turnover ratio can lead to reduced carrying costs and lower risk of obsolete inventory, while a lower ratio may indicate inefficiencies in operations or supply chain management that need to be addressed. Overall, monitoring inventory turnover is crucial for businesses to optimize their inventory management practices, improve cash flow, and enhance overall operational efficiency. It provides insights into the sales trends, production efficiency, and supply chain dynamics of a company, helping to drive informed decision-making and strategic planning.