What is the inventory turnover ratio and why is it important?

What is the inventory turnover ratio and why is it important?

The inventory turnover ratio measures how many times inventory is sold and replaced over a period. It's important because it indicates how efficiently a company manages its inventory.

How do you calculate the inventory turnover ratio?

You calculate it by dividing the cost of goods sold (COGS) by the average inventory during a specific period.

What is a good inventory turnover ratio?

A good inventory turnover ratio varies by industry, but generally, a ratio between 5 and 10 is considered healthy.

What happens if the inventory turnover ratio is too low?

If the ratio is too low, it may indicate overstocking, poor sales, or inefficiencies in inventory management.

Can a high inventory turnover ratio be bad?

Yes, a very high ratio might suggest that a company is not keeping enough inventory on hand, which can lead to stockouts and lost sales.