What is 'Inventory Turnover'?

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a period. The company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. It is calculated as sales divided by average inventory.

BREAKING DOWN 'Inventory Turnover'

Inventory turnover measures how fast a company sells inventory and analysts compare it to industry averages. Low turnover implies weak sales and, excess inventory. A high ratio implies either strong sales or large discounts.

The speed with which a company can sell inventory is a critical measure of business performance. It is also one component in the calculation of return on assets — the other component is profitability. The return a company makes on its assets is a function of how fast it sells inventory at a profit. High turnover means nothing unless the company is making a profit on each sale.

Source : Investopedia