Inventory Turnover Definition

Inventory turnover is a measure of how efficiently a company is using its inventory to produce sales. The formula for inventory turnover is:

Inventory Turnover = Cost of Goods Sold / Average Inventory

For example, if a company has $100,000 in sales and an average inventory of $20,000, its inventory turnover would be 5 ($100,000/$20,000).

A high inventory turnover ratio is generally indicative of a well-run company that is efficiently using its inventory to generate sales. A low ratio may indicate that the company is carrying too much inventory or that its sales are too low.