What does the inventory turnover ratio indicate?

The inventory turnover ratio is a crucial metric in inventory management that indicates how often inventory is sold and replaced over a specific period, typically within a year. A high turnover ratio suggests that a company is selling goods quickly and efficiently, which is often a sign of good inventory management practices. It reflects the company's ability to convert inventory into revenue, indicating how well it is managing its stock levels in relation to sales volume.

By understanding this ratio, companies can make informed decisions about purchasing and restocking, allowing them to optimize their inventory levels and reduce carrying costs. A balanced inventory turnover ratio can lead to improved cash flow and operational efficiency, as it minimizes the amount of money tied up in unsold inventory.