Inventory Turnover

Inventory Turnover

Dictionary Definition

This ratio measures the number of times inventory is turned over during the year. High inventory turnover can indicate greater liquidity or superior merchandising. Conversely, it can indicate a shortage of needed inventory for sales. Low inventory turnover can indicate poor liquidity, overstocking or obsolescence. On the positive side, it can indicate a planned inventory buildup in the case of material shortages.

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Why it Matters to You

As an example, if the cost of sales for the month totals $400,000 and you carry $100,000 in inventory, the turnover rate is four, which indicates that a company sells its entire inventory four times every year.