Inventory Turnover

Inventory Turnover is a measure of the number of times inventory is sold or used in a given time period such as one year. It is a good indicator of inventory quality, efficient buying practices, and inventory management.

Inventory Turnover

Inventory Turnover is a measure of the number of times inventory is sold or used in a given time period such as one year.
 

 


Inventory Turnover Formula

Inventory Turnover is calculated by dividing the cost of goods sold by the average inventory level ((beginning inventory + ending inventory)/2).

Inventory Turnover formula:  Cost Of Goods Sold / Average Inventory

Interpretation of Inventory Turnover

Inventory Turnover is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices, and inventory management.

The company's Inventory Turnover should be compared against industry averages. A low inventory turnover may be the result of ineffective inventory management, poor sales or carrying out-of-date inventory to avoid writing off inventory losses against income. A high number typically highlights a greater sales efficiency and a lower risk of loss through un-saleable stock.



Inventory Turnover that is too high and out of proportion to industry norms suggests losses due to shortages, and poor customer-service. Such a situation is usually accompanied by a low gross profit figure. This means that a company needs to sell a lot of items to maintain an adequate return on the capital invested in the company.


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