Define: Inventory-Turnover Ratio

The inventory-turnover ratio is a financial metric used to measure how efficiently a company is managing its inventory by comparing the cost of goods sold to the average inventory for a specific period of time.

The inventory-turnover ratio is calculated by dividing the cost of goods sold by the average inventory for the period. The formula is: Cost of Goods Sold / Average Inventory.

A high inventory-turnover ratio typically indicates that a company is selling its inventory quickly and efficiently, which can be a positive sign of strong sales and effective inventory management.

A low inventory-turnover ratio may indicate that a company is struggling to sell its inventory, which could be a sign of poor sales performance or ineffective inventory management.

A company can improve its inventory-turnover ratio by implementing better inventory management practices, reducing excess inventory, and increasing sales through marketing and promotions.

A high inventory-turnover ratio can lead to improved cash flow, as the company is able to quickly convert its inventory into sales and collect payment from customers.

A high inventory-turnover ratio can lead to higher profitability, as it indicates that the company is efficiently managing its inventory and generating sales.

The inventory-turnover ratio does not provide a complete picture of a company’s inventory management, as it does not take into account the specific types of inventory or the demand for the products.

The inventory-turnover ratio can impact a company’s financial performance by influencing its profitability, cash flow, and overall efficiency in managing inventory.

Industry benchmarks for inventory-turnover ratios can vary by sector, but generally, a higher ratio is considered more favorable. It’s important for companies to compare their inventory-turnover ratios to industry averages to assess their performance.