What does inventory turnover measure?

Inventory turnover measures the rate at which a company sells and replaces its inventory during a specific period. This metric reflects how effectively a company is managing its inventory and converting it into sales. A higher inventory turnover ratio indicates that a company is selling goods quickly and may suggest that the inventory management processes are functioning well. It can also imply strong sales performance, as products are moving swiftly off the shelves. Conversely, a low inventory turnover may indicate overstocking or less effective sales strategies.

Understanding inventory turnover is crucial for businesses, as it helps managers make informed decisions regarding purchasing, pricing, and production planning. Effective inventory turnover contributes to improved cash flow and can reduce storage costs by minimizing excess inventory.