Inventory Turnover
A ratio measuring how efficiently a company sells its inventory, calculated by dividing cost of goods sold by average inventory for a period.
Inventory Turnover
A financial ratio that measures how efficiently a company manages and sells its inventory during a period, calculated by dividing cost of goods sold by average inventory.
For instance, a grocery store with annual cost of goods sold of $4 million and average inventory of $500,000 would have an inventory turnover ratio of 8, meaning it sells and replaces its inventory eight times per year, or approximately every 45 days.
Higher turnover ratios typically indicate more efficient inventory management, as inventory is converted to sales more quickly, reducing holding costs and obsolescence risks. However, extremely high turnover might suggest stockouts and lost sales. Optimal turnover varies significantly by industry, with perishable goods retailers generally having higher turnover than luxury goods or industrial equipment sellers. This metric helps assess operational efficiency, working capital management, and competitive positioning.