Inventory Turnover Ratio Definition
The inventory turnover ratio is a measure of how quickly a company sells its inventory. The higher the ratio, the faster the company is selling its inventory. The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory.
The formula for the inventory turnover ratio is:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
For example, if a company has a cost of goods sold of $100,000 and an average inventory of $50,000, their inventory turnover ratio would be 2.0. This means that on average, the company sells their entire inventory every two days.
A high inventory turnover ratio is generally seen as a good thing, as it means that the company’s products are in high demand and are selling quickly. A low inventory turnover ratio could mean that the company’s products are not in high demand or that they are not selling as quickly as they could be.
