The ratio of annual sales to average inventory is a common method used to measure the speed at which inventory is produced and sold. A high turnover ratio is considered a good sign and low turnover is an unhealthy sign, indicating excess inventory or poor sales.
The inventory turnover ratio indicates how many times a company has sold and replaced inventory during a given period. Analysts can divide the days in the period by the inventory turnover to estimate the days it takes to sell the inventory on hand.
Calculating inventory turnover can help businesses make better decisions on pricing and manufacturing runs, how and when to purchase new inventory as well as when to leverage/move excess inventory.
