What is Inventory Turnover?
Definition
Inventory turnover measures how many times a company sells and replaces its inventory during a period. A higher turnover indicates efficient inventory management and strong demand, while low turnover may signal overstocking or weak sales.
Detailed Explanation
Inventory turnover is calculated by dividing cost of goods sold (COGS) by average inventory. Using COGS rather than revenue provides a more accurate measure because inventory is recorded at cost. The resulting number indicates how many complete inventory cycles occurred during the year.
The reciprocal metric, days inventory outstanding (DIO), converts turnover into days: 365 divided by inventory turnover. A turnover of 12x means inventory is held for roughly 30 days on average. Grocery stores might have turnover of 14-20x (18-26 days), while jewelry stores may have turnover of 1-2x (180-365 days).
High inventory turnover is generally positive but must be balanced against stockout risk. Just-in-time (JIT) inventory systems maximize turnover but leave companies vulnerable to supply chain disruptions, as demonstrated during the COVID-19 pandemic. Many companies now maintain higher safety stock levels.
Declining inventory turnover relative to peers is a red flag that can indicate obsolete products, poor demand forecasting, or channel stuffing (shipping excess product to distributors to inflate revenue). Investors should compare turnover trends alongside revenue growth — if revenue is growing but turnover is declining, the company may be building inventory faster than it can sell.
Formula
Inventory Turnover = Cost of Goods Sold / Average InventoryExample
A retailer with $10B in COGS and average inventory of $2B has inventory turnover of 5.0x, meaning it sells through its entire inventory roughly every 73 days.
Frequently Asked Questions
What is a good inventory turnover ratio?
Why would inventory turnover decline?
Related Terms
Revenue
Revenue, also called sales or top line, is the total amount of money a company earns from selling its products or services before any expenses are deducted. It is the first line item on the income statement and the starting point for profitability analysis.
Gross Margin
Gross margin is the percentage of revenue remaining after subtracting the cost of goods sold (COGS). It measures how efficiently a company produces its products or delivers its services and is a key indicator of pricing power and production efficiency.
Working Capital
Working capital is the difference between a company's current assets and current liabilities. It measures a company's short-term liquidity and operational efficiency, indicating whether it has enough resources to cover its near-term obligations.
Asset Turnover
Asset turnover measures how efficiently a company uses its total assets to generate revenue. It is calculated by dividing revenue by total assets and indicates how many dollars of sales each dollar of assets produces.
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Disclaimer: The information on this page is provided for educational and informational purposes only and does not constitute investment advice. AI-generated analysis may contain errors or inaccuracies. Always conduct your own research and consult a qualified financial advisor before making investment decisions.
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