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.