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Inventory turnover is a financial indicator that assesses how frequently a company's stock is sold and replaced over a specific time frame. It is used to evaluate how effectively a firm manages its inventory and can show how financially sound a company is.
The cost of goods sold (COGS) divided by the average inventory over a specified time is used to calculate inventory turnover. The average inventory is the typical quantity of inventory kept by the business during a certain period, and the COGS is the total cost of goods sold during that time.
A high inventory turnover ratio can be an indication of healthy sales and cash flow because it shows how quickly and effectively a business is selling its products. An extremely high inventory turnover ratio, however, can also indicate that a business may be having trouble meeting demand or may be losing revenue as a result of insufficient inventory levels.
In contrast, a low inventory turnover ratio can mean that a business is keeping too much inventory, which would tie up cash and raise storage and holding costs. A low inventory turnover ratio may also be a red flag for investors because it suggests that a business is not selling its goods efficiently.
A company's operational effectiveness, sales performance, and financial health may all be learned from its inventory turnover, which is a crucial financial metric. Investors and analysts can better comprehend a company's overall performance and potential for growth by tracking inventory turnover and comparing it to industry norms.
