Inventory turnover

Inventory turnover measures how many times a company sells and replaces its inventory over a given period, usually a year, and is a core indicator of how efficiently inventory is being managed.

It's calculated as inventory turnover = cost of goods sold / average inventory value. A turnover of 8 means, on average, the company sells through its entire inventory eight times a year. It's the inverse framing of days of supply, which expresses the same underlying efficiency in days rather than as a ratio: roughly, days of supply = 365 / inventory turnover.

Higher turnover generally frees up working capital and reduces holding and obsolescence costs, but turnover that's too high risks stockouts if safety stock is cut too aggressively to chase the ratio. The right level varies enormously by industry — perishable goods turn over far faster than heavy equipment — so turnover is best compared within a category or against a company's own history, not across unrelated industries. A common pitfall is calculating average inventory from only a start-of-year and end-of-year snapshot when inventory is seasonal, which can significantly distort the ratio in either direction.