Definition
Inventory Turnover Ratio
The inventory turnover ratio measures how many times a company sells and replaces its inventory over a period, indicating how efficiently stock is managed.
It is calculated as cost of goods sold divided by average inventory. A high turnover suggests strong sales and lean stock management, while a low turnover may signal slow-moving or obsolete inventory tying up cash.
Dividing 365 by the turnover gives inventory days, the average time stock sits before being sold. The ideal level varies by industry: fast-moving consumer goods turn over far quicker than capital goods. Falling turnover can be an early warning of weakening demand or overstocking.
Related terms
- Cash Conversion CycleThe cash conversion cycle measures how many days it takes a company to turn investments in inventory and receivables back into cash.
- Cost of Goods Sold (COGS)Cost of Goods Sold is the direct cost of producing the goods or services a company sells, including raw materials, direct labour and manufacturing overheads.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.