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Determines the ability of a company to sell its inventory by estimating the number of times its inventory was sold.[sc:kit02 ]
Inventory Turnover Formula
Explanation of Inventory Turnover
Also called the Inventory Turns ratio, the Inventory Turnover shows how many time a company can sell, or turnover, its inventory. From this, you can gauge how well the company manages to sell its Inventories. Another way of saying this is how efficiently the company converts inventory into sales.
Importance of Inventory Turnover
If the company can quickly sell its Inventories, then its Cost of Goods Sold is likely lower, resulting in a higher Inventory Turnover. Conversely, if the company cannot sell its inventory very well, then the Inventory Turnover will be low.
You will have to watch this figure closely – if the Inventory Turnover Ratio climbs too high, then the company may be keeping too little inventory. This could cause lost profits due to customer orders that had to wait until inventory arrived.