What it is:
This ratio tells how often a business' inventory turns over during the course of the year.
Because inventories are the least liquid form of asset, a high inventory turnover ratio is
generally positive. On the other hand, an unusually high ratio compared to the average for
your industry could mean a business is losing sales because of inadequate stock on hand.
When to use it:
If your business has significant assets tied up in inventory, tracking your turnover is
critical to successful financial planning. If inventory is turning too slowly, it could
indicate that it may be hampering your cash flow. Because this ratio judges annual inventory
turns, it is usually conducted once a year.
The formula:
Cost of goods sold divided by the average value of inventory.
Calculate your turnover ratio:
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