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Glossary

Inventory Turnover Ratio

Fundamental Analysis

The Inventory Turnover Ratio is a financial metric used in fundamental analysis that measures the number of times a company*s inventory is sold and replaced over a certain period of time, often in a year. It is used to evaluate how efficiently a company manages its inventory and whether it is generating sales. The formula for this ratio is as follows:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

In this formula, the cost of goods sold represents the cost of the merchandise that was sold during a specific period, such as a year. The average inventory is the average amount of inventory that a company holds during that same period. This ratio is expressed as a numerical value, such as 5, which means that inventory was turned over 5 times during the period in question.

A high inventory turnover ratio typically indicates that a company is efficiently managing its inventory and selling its merchandise quickly, which can be seen as a positive sign by investors. However, a low ratio may suggest that a company is struggling to sell its inventory, which can be seen as a negative sign. It is important to note that inventory turnover ratios can vary widely between different industries and types of businesses, so it is important to compare a company*s ratio to its industry peers.




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