What does the Inventory Turnover Ratio measure?

The Inventory Turnover Ratio measures the speed at which inventory is sold and replaced within a given period, typically a year. This ratio is a key indicator of how efficiently a company manages its inventory. A higher inventory turnover ratio suggests that a company is selling its inventory quickly and effectively restocking it, which is usually a sign of strong sales and effective inventory management practices. Conversely, a lower ratio might indicate overstocking or issues with sales performance, leading to larger volumes of unsold goods.

Understanding this metric helps businesses gauge their operational efficiency and can influence decisions related to purchasing, production, and sales strategies. Therefore, the focus on the speed of inventory movement is what sets this ratio apart in assessing a company's performance in managing its stock.