Definition: Inventory turnover, often called merchandise turnover, is a efficiency ratio that calculates the number of times average inventory is sold during a period. Inventory turnover ratio meaning Inventory turnover ratio or stock turnover ratio basically indicates the number of times inventory was turned over or sold during a period (generally a year). In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. The inventory turnover formula measures the rate at which inventory is used over a measurement period. Inventory turns, also referred to as inventory turnover and inventory turnover ratio, are a popular measurement used in inventory management to assess operational and supply chain efficiency. Ideally, the company’s inventory turnover ratio should be compared with the industry average. In the event that the firm had an exceptional year and the market paid a premium for the firm's goods and services then the numerator may be an inaccurate measure. {\displaystyle {\mbox{Inventory Turn}}={\frac {\text{Number of Units Sold (Over a given period)}}{\text{Average Number of Units (For the period)}}}}. The important issue is that any organization should be consistent in the formula that it uses. If an investor wants to check how well a company is managing its inventory, she would look at how higher or lower the inventory turnover ratio of the company is. The inventory of a retail store represents the … Inventory Turnover Definition. Low-margin industries tend to have higher inventory turnover ratios than high-margin industries because low-margin industries must offset lower per-unit profits with higher unit-sales volume. Can Working Capital Cycle or Cash Conversion Cycle be Factored in Economic Performance of Pakistani Corporate Firms? Stock turnover also indicates the briskness of the business. Inventory Turnover mini-antipattern: Some manufacturing companies - typically FMCGs - implement inventory turnover ratios as a corporate performance KPI.Teams are incentivized, sometimes through bonuses, to lower the turns. A low inventory turnover compared to the industry average and competitors means poor inventories management. Simply, this ratio measures the capacity of a firm to generate revenues from the sale of its inventory. It is also called a stock turnover ratio. A high turnover ratio is desirable for Walmart because of its retail business, where high inventory turnover ratios are observed. This shows the company does not overspend by buying too much inventory and wastes resources by storing non-salable inventory. The most basic formula for average inventory: Multiple data points, for example, the average of the monthly averages, will provide a much more representative turn figure. The inventory turnover ratio, also known as the stock turnover ratio, is an efficiency ratio that measures how efficiently inventory is managed. Posts neutral 1H09 US GAAP numbers - Sep 30, 2009, Inventory Supported Maintenance Repair and Overhaul, Inventory, Shipping, Receiving and Picking. The turnover rate tells the business if its products sell quickly or slowly. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages. Another insight provided by the inventory turnover ratio is that if inventory is turning over slowly, then the warehousing cost attributable to each unit will be higher.[3]. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. Inventory turnover is commonly expressed as a ratio. = The inventory turnover ratio is a financial metric that tells you how many times throughout a period the company converted its inventories in cash for the business.In fact, that can be calculated either by dividing the sales by the average stock or by dividing the cost of goods sold by the average inventory. Cost of sales yields a more realistic turnover ratio, but it is often necessary to use sales for purposes of comparative analysis. It is calculated to see if a business has an excessive inventory in comparison to its sales level. It shows how well a company manages its inventory levels and how frequently a … The equation for inventory turnover equals the cost of goods sold divided by the average inventory. The inventory turnover ratio indicates the number of times inventory is sold during the year. Definition of inventory turnover ratio. 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