What is Inventory Turnover?

Definition: An equation that measures the number of times inventory is sold or used over a period.

Formula

INVENTORY TURNOVER = COST OF GOODS SOLD / AVERAGE INVENTORY

Keep in mind that the result is an average due to sales and inventory level fluctuations throughout the year. Rates vary throughout industries, and within differences in scale of businesses.

Significance

A low turnover rate may be a troubling sign; however it may be normal under certain circumstances. Generally a low turnover rate may indicate overstocking of inventory, obsolescence, or deficiencies in the product line or elsewhere.

A low rate may be appropriate where higher inventory levels occur in anticipation of rapidly rising prices or shortages. A very high rate describes inadequate inventory levels with a loss in business.