Inventory Turnover

Inventory turnover

A measure of how often the company sells and replaces its inventory. It is the ratio of annual cost of sales to the latest inventory. One can also interpret the ratio as the time to which inventory is held. For example a ratio of 26 implies that inventory is held, on average, for two weeks (365 days in a year divided by inventory turnover ratio of 26 equals 14 days pr 2 weeks average inventory holding period). It is best to use this ratio to compare companies within an industry (high turnover is a good sign) because there are huge differences in this ratio across industries.

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Inventory Turnover

A measure of how long it takes, on average, for a company to sell and replace its inventory. Inventory turnover can help a company or potential investor determine how well the company manages its inventory. Higher inventory turnover is considered to be desirable. The turnover is calculated as follows:

Inventory turnover = Cost of goods sold / ( ( Beginning inventory + ending inventory ) / 2 )

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inventory turnover

A measure indicating the number of times a firm sells and replaces its inventory during a given period and calculated by dividing the cost of goods sold by the average inventory level. A relatively low inventory turnover may indicate ineffective inventory management (that is, carrying too large an inventory) or carrying out-of-date inventory to avoid writing off inventory losses against income. A high inventory turnover is generally desirable.

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Inventory Turnover

What Does Inventory Turnover Mean?

A ratio showing how many times a company's inventory is sold and replaced over a certain period. It is calculated as follows:

Investopedia explains Inventory Turnover

Although the first calculation is used more frequently, COGS (cost of goods sold) may be substituted because sales are recorded at market value, whereas inventories usually are recorded at cost. Also, average inventory may be used instead of ending inventory to minimize seasonal factors. A low turnover ratio implies poor sales and therefore excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. This also opens up the company to trouble if prices begin to fall.

Related Terms:
• Accrual Accounting
• Asset Turnover
• Cost of Goods Sold—COGS
• Gross Profit Margin
• Inventory