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 lastest inventory. One can also interpret the ratio as the time to which inventory is held. For example a ratio of 26 implies that investory is held, on average, for two weeks. 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 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inventory turnover may indicate ineffective inventory management (that is, carrying too large an inventory) or carrying out-of-date inventory to avoid writing off inventory losses against income.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