Overview

Inventory turnover, or the inventory turnover ratio, measures the number of times a company is able to sell and replace its inventory within a specific time period. The formula for calculating the inventory turnover ratio is as follows:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

A high inventory turnover is preferred because it indicates that the company is selling goods faster and spending less on holding the inventory, while a low inventory turnover ratio is a sign of weak sales and abundant inventories for a business.

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