What is Inventory Turnover?
Inventory turnover is a liquidity ratio that shows how efficient a company is at converting its inventory into sales.
How to Calculate Inventory Turnover
Inventory turnover is calculated by dividing cost of goods sold (COGS) by average inventory.
COGS is found on a company’s income statement. Average inventory is calculated by averaging the total inventories on the balance sheets of the current and previous reporting periods.
How to Interpret Inventory Turnover
A high inventory turnover number shows that a company can turn its inventory into sales many times, suggesting efficient cash management.
The opposite is a low inventory turnover, which means that a company doesn’t turn over its inventory as often, which also means that cash is tied up in inventory for longer.