What is inventory turnover ratio?

The inventory turnover ratio is a crucial financial metric that indicates how frequently a company sells and replenishes its inventory during a specific period, typically a year. This ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory. A high inventory turnover ratio suggests that a company is effectively managing its inventory levels and is able to sell its stock quickly, which can be indicative of strong sales performance and efficient inventory management. Conversely, a low turnover ratio may point to overstocking, declining sales, or issues with inventory management.

This ratio is particularly important for businesses in retail or manufacturing, where inventory management directly affects profitability. By keeping track of how often inventory is sold, businesses can better understand their sales patterns, optimize their inventory levels, and make informed decisions about purchasing and production.

Other options do not correctly describe the inventory turnover ratio. While profit measurement, employee performance, and total assets versus liabilities are important financial considerations, they do not pertain specifically to how inventory is sold and replaced, which is the key aspect of the inventory turnover ratio.