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DEFINITION OF 'INVENTORY TURNOVER'


Inventory turnover is a ratio showing how many times a company's inventory is sold and
replaced over a period. The days in the period can then be divided by the inventory turnover
formula to calculate the days it takes to sell the inventory on hand or "inventory turnover
days."
Generally it is calculated as:
Inventory Turnover = Sales / Inventory
Hoever, it may also be calculated as:
Inventory Turnover = Cost of Goods Sold / Average Inventory

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BREAKING DOWN 'INVENTORY TURNOVER'


Although the first calculation is more frequently used, COGS (cost of goods sold) may be
substituted because sales are recorded at market value, while inventories are usually recorded
at cost. Also, average inventory may be used instead of the ending inventory level to
minimize seasonal factors.
This ratio should be compared against industry averages. A low turnover implies poor sales
and, therefore, excess inventory. A high ratio implies either strong sales or ineffective
buying.

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High inventory levels are unhealthy because they represent an investment with a rate of
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InventoryTurnoverDefinition|Investopedia

return of zero. It also opens the company up to trouble should prices begin to fall.
For more details, check out "How
"How do I calculate the inventory turnover ratio?"
ratio?"
Things to Remember

A low turnover is usually a bad sign because products tend to deteriorate as they sit in a
warehouse.
Companies selling perishable items have very high turnover.
For more accurate inventory turnover figures, the average inventory figure, ((beginning
inventory + ending inventory)/2), is used when computing inventory turnover.
Average inventory accounts for any seasonality effects on the ratio.
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INVESTING

What are Intangible Assets?


Intangible assets represent potential revenue. Take an intangible asset like
brand recognition: There is value in people remembering your company
and then wanting to buy its products.

FUNDAMENTAL ANALYSIS

Measuring Company Efficiency


Three useful indicators for measuring a retail company's efficiency are its
inventory turnaround times, its receivables and its collection period.

FUNDAMENTAL ANALYSIS

Inventory: FIFO, LIFO


Whether a company chooses FIFO or LIFO has important implications for
the bottom line and for tax liability.

INVESTING

Asset Turnover Ratio


Investopedia explains: The asset turnover ratio is a measure of a company's
ability to use its assets to generate sales or revenue, and is a calculation of
the amount of sales or revenue generated ...

FUNDAMENTAL ANALYSIS

Reading The Inventory Turnover


Inventory turnover is a ratio that shows how quickly a company uses up its
supply of goods over a given time frame. Inventory turnover may be
calculated as the market value of sales divided by ...

FUNDAMENTAL ANALYSIS

Inventory Valuation For Investors: FIFO And LIFO


We go over these methods of calculating this component of the balance
sheet, and how the choice affects the bottom line.

INVESTING BASICS

Understanding The Cash Conversion Cycle


Find out how a simple calculation can help you uncover the most efficient
companies.

RELATED FAQS
Q: What is the formula for calculating the inventory turnover ratio in Excel?
A: The inventory turnover ratio is used in fundamental analysis to determine the amount of times a
company sells and replaces ... Read Full Answer >>

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A: Primary equity evaluation metrics used by analysts and investors to evaluate companies in the
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A: Since companies that sell consumer packaged goods are traditionally low-margin, high-volume
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Q: How does the use of International Financial Reporting Standards (IFRS) affect key ...
A: While much has been achieved since 2002 in convergence between international financial reporting
standards (IFRS) and U.S. ... Read Full Answer >>

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Q: What does inventory turnover tell an investor about a company?


A: The inventory turnover ratio determines the number of times a company's inventory is sold and
replaced over a certain period. ... Read Full Answer >>

Q: Which industries tend to have the most inventory turnover?


A: The industries that tend to have the most inventory turnover are those with high volume and low
margins, such as retail, ... Read Full Answer >>

Q: What does the book-to-bill ratio in the electronics sector refer to?
A: The collection and analysis of data can significantly complement and enhance operations management,
leading to increased ... Read Full Answer >>

Q: How do you analyze inventory on the balance sheet?


A: In accounting, inventory represents a company's raw materials, work in progress and finished
products. Financial professionals ... Read Full Answer >>

Q: What sorts of factors decrease cash flow from operating activities?


A: The operations section of the cash flow statement reconciles net income and cash flows by adding back
noncash expenses and ... Read Full Answer >>

Q: What is the formula for calculating inventory turnover?


A: The inventory turnover ratio is an important efficiency metric, especially for those in retail. This ratio
compares the amount ... Read Full Answer >>

Q: Why are efficiency ratios important to investors?


A: When analyzing a company's potential for investment, it is important to examine its financial
performance from every angle. ... Read Full Answer >>

Q: How does inventory turnover affect the cash conversion cycle (CCC)?
A: A higher, or quicker, inventory turnover decreases the cash conversion cycle (CCC). A lower, or
slower, inventory turnover ... Read Full Answer >>

Q: What are the generally accepted accounting principles for inventory reserves?
A: As with most matters related to generally accepted accounting principles (GAAP), accountants
assigned with the task of applying ... Read Full Answer >>

Q: What does a high inventory turnover tell investors about a company?


A: Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into
sales. Below is ... Read Full Answer >>

Q: Why is it sometimes better to use an average inventory figure when calculating the ...
A: Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into
sales. For a couple ... Read Full Answer >>

Q: How do I calculate the inventory turnover ratio?


A: Managing inventory levels is important for most businesses and this is especially true for retailers and
any company that ... Read Full Answer >>

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