What does Inventory Turnover measure?

Inventory turnover measures the average number of times inventory is sold and replaced over a specific period. This metric is crucial for understanding how efficiently a company manages its inventory. A higher turnover rate indicates that inventory is sold quickly, suggesting strong sales performance and effective inventory management. Conversely, a low turnover rate may indicate overstocking or sales issues, which can lead to increased holding costs and potential obsolescence of goods.

This measurement is essential for decision-making in various areas, including purchasing, production planning, and financial analysis. It allows companies to assess their operational efficiency and helps in identifying trends over time. In the context of financial performance, inventory turnover directly impacts cash flow because quicker inventory turnover can lead to faster revenue generation. Thus, the focus on the average number of times inventory is sold within a period serves as a precise indicator of a company's operational effectiveness in managing inventory.