The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days".
Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors.
This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.
High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.
Investment dictionary. Academic. 2012.
Look at other dictionaries:
Inventory turnover — The Inventory Turnover is an equation that equals the cost of goods sold divided by the average inventory. Average inventory equals beginning inventory plus ending inventory divided by 2. Inventory Turnover EquationThe formula for inventory… … Wikipedia
Inventory turnover — The ratio of annual sales to average inventory which measures the speed that inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales. The New York Times Financial Glossary * * * inventory… … Financial and business terms
inventory turnover — The ratio of annual sales to average inventory, which measures the speed at which inventory is produced and sold. Low turnover is an unhealthy sign, indicating excess stocks and/or poor sales. Bloomberg Financial Dictionary * * * inventory… … Financial and business terms
inventory turnover — stock turnover A ratio that measures the number of times items of stock are used annually. To obtain an accurate measure of stock turnover the following formula is used for each commodity: number of units used per annum/number of units in stock.… … Accounting dictionary
inventory turnover — Fin an accounting ratio of the number of times inventory is replaced during a given period. The ratio is calculated by dividing net sales by average inventory over a given period. Values are expressed as times per period, most often a year, and a … The ultimate business dictionary
inventory turnover — period of time in which the inventory of a business is completely used up and restocked … English contemporary dictionary
inventory turnover — /ˌɪnvənt(ə)ri tɜ:nəυvə/ noun especially US the total value of stock sold during a year, divided by the value of the goods remaining in stock … Dictionary of banking and finance
Inventory turnover ratio — is one of the Accounting Liquidity ratios, a financial ratio. This ratio measures the number of times, on average, the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory. A popular variant of the… … Wikipedia
inventory turnover ratio — (Accounting) index of the inventory held by a company in contrast with the sales (used to assess the effectivity of holding inventory) … English contemporary dictionary
Оборачиваемость запасов (INVENTORY TURNOVER) — Отношение, показывающее, сколько раз был продан (использован для производства) средний объем запасов в течение года. Рассчитывается делением себестоимости реализации на среднюю стоимость запасов. Средний объем запасов может определяться как… … Словарь терминов по управленческому учету