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Inventory turnover

Inventory Turnover

Inventory turnover is a financial ratio that measures how efficiently a company manages its inventory by calculating how many times its inventory is sold and replaced over a specific period. A high inventory turnover indicates efficient inventory management, while a low turnover may suggest overstocking or weak sales. The formula for inventory turnover is the cost of goods sold (COGS) divided by the average inventory for the period.

Example

A company with $500,000 in cost of goods sold and an average inventory of $100,000 has an inventory turnover of 5, meaning it sells and replaces its inventory five times per year.

Key points

• Measures how efficiently a company sells and replaces its inventory.

• High turnover indicates strong sales and efficient inventory management.

• Calculated as cost of goods sold (COGS) divided by average inventory.

Quick Answers to Curious Questions

What does a high inventory turnover indicate?

A high turnover indicates efficient inventory management, suggesting strong sales and effective stock replenishment practices.

How is inventory turnover calculated?

Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory during a specific period.

What are the risks of low inventory turnover?

Low turnover can indicate overstocking, slow sales, or poor inventory management, leading to potential losses or excess holding costs.

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