INVENTORY TURN

OVER RATIO
A financial ratio showing how many times a
company has sold and replaced inventory
during a given period.
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COGS = $200000 COGS = $100000

Avg. Inv = $20000 Avg. Inv = $20000

Inventory turnover = 10 Inventory turnover = 5

COMPARATIVELY LOW INVENTORY TURNOVER
MEANS THAT A COMPANY HAS POOR SALES OR
TOO MUCH INVENTORY
HIGH INVENTORY TURNOVER CAN INDICATE
STRONG SALES, BUT IT CAN ALSO INDICATE
THAT THE COMPANY DOESN'T HAVE AN
EFFECTIVE INVENTORY PURCHASING PLAN IN
PLACE
Limitations of Inventory
Turnover
Inventory turnover is only useful for comparing similar companies, because the ratio
varies widely by industry.
A relatively high inventory turnover ratio might indicate insufficient stocking that is
costing the company sales, while low inventory turnover could reflect bulk orders
helping the company cut costs or preparations for a product launch, rather than
inefficient inventory management.
Because the inventory turnover ratio uses cost of sales or COGS in its numerator, the
result depends crucially on the company’s cost accounting policies and is sensitive to
changes in costs.