How to Define Inventory Turnover Ratio

Inventory turnover ratio is a common investing term. Read on to learn how to define inventory turnover ratio.

Instructions

1. Know that the inventory turnover ratio represents how often a company's inventory is sold, then replaced, over a particular period. In other words, it shows how long it takes for a company to sell its goods and then replace them.

2. Keep in mind that he inventory turnover ratio can be calculated with a simple equation: sales divided by inventory.

3. Understand Average inventory turnover ratios vary by industry, so a company's ratio should always be compared to others in its field for context. Generally, low turnover is a bad sign, since it signifies that the company is having a hard time selling its goods. The longer goods remain unsold, the longer the money the company paid to produce those goods is tied up in them, with a return of zero until they are sold. Higher inventory turnover ratios, therefore, are desirable.