Inventory turnover ratio

Definition

The inventory turnover ratio measures how many times a company's inventory is sold and replaced over a specific period. It indicates the efficiency of inventory management in generating sales.

5 Must Know Facts For Your Next Test

1. A high inventory turnover ratio generally indicates strong sales or effective inventory management.
2. A low inventory turnover ratio may suggest overstocking, obsolescence, or weak sales.
3. The formula for calculating the inventory turnover ratio is Cost of Goods Sold (COGS) divided by average inventory.
4. Average inventory can be calculated by taking the sum of the beginning and ending inventory for a period and dividing by two.
5. The inventory turnover ratio can vary significantly between industries, so it’s important to compare it within the same industry.

Review Questions

• How do you calculate the inventory turnover ratio?
• What does a high inventory turnover ratio indicate?
• Why is it important to compare the inventory turnover ratio within the same industry?

Related terms

Cost of Goods Sold (COGS): The direct costs attributable to the production of goods sold by a company.

Average Inventory:

The average amount of inventory held over a certain period, typically calculated as (Beginning Inventory + Ending Inventory) / 2.

Days Sales of Inventory (DSI): A financial metric that shows how many days it takes for a company to sell its entire inventory during a specific period.