![]() Inventory Turnover Ratio ExplainedĬalculating and tracking inventory turnover helps businesses make smarter decisions in a variety of areas, including pricing, manufacturing, marketing, purchasing and warehouse management. Knowing your turnover ratio depends on effective inventory control, also known as stock control, where the company has good insight into what it has on hand. A higher ratio is more desirable than a low one as a high ratio tends to point to strong sales. The turnover ratio is derived from a mathematical calculation, where the cost of goods sold is divided by the average inventory for the same period. The formula can also be used to calculate the number of days it will take to sell the inventory on hand. The inventory turnover ratio is the number of times a company has sold and replenished its inventory over a specific amount of time. Conversely, a higher ratio can indicate insufficient inventory on hand, and a lower one can indicate too much inventory in stock.
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