inventory turnover

A ratio calculated as cost of goods sold divided by average inventory. An inventory turnover ratio of 2.6x means that inventory was “turned over” or replenished 2.6 times during a period of one year, which equates to inventory being turned over once every 140 days. A higher turnover than the industry average means that inventory is sold at a faster rate, signaling inventory management effectiveness and also that less company resources are tied up in inventory. However, an unusually high inventory turnover rate can be a sign that a company’s inventory is too lean, and the firm may be unable to keep up with any increased demand. Inventory turnover is very industry-specific: In an industry where inventory gets stale quickly, seek out companies with high inventory turnover.