What is Inventory Turnover?

Full Definition

Inventory turnover measures how quickly a business sells through its stock, calculated as the cost of goods sold over a period divided by the average value of inventory held during that same period. A higher inventory turnover generally means stock is being sold quickly and cash is not sitting idle in unsold goods, while a low turnover can signal overstocking, slow-moving or obsolete stock, or weakening demand -- all of which tie up cash and increase the risk of having to discount goods later to clear them. The figure is often converted into "days inventory outstanding" (365 divided by inventory turnover) to express it as an average number of days stock is held before being sold, which feeds directly into the cash conversion cycle alongside debtor days and creditor days. What counts as a "good" inventory turnover varies enormously by sector -- a supermarket selling perishable food will typically turn over stock many times faster than a specialist retailer of high-value, slow-moving items such as furniture or jewellery -- so the ratio is most useful when tracked over time for the same business or benchmarked against close sector peers rather than compared across unrelated industries.

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