Fundamental Glossary / Working Capital & Operational Efficiency
Inventory Turnover Ratio
How many times inventory is sold and replaced during a period.
Formula
Cost of goods sold / average inventory. Using sales in the numerator overstates the turns because sales include profit.
What it means
A higher turnover means stock sits for less time. That frees cash and reduces obsolescence. What is "high" depends on the product: groceries turn far faster than heavy machinery.
Average inventory, not only the year-end figure, belongs in the denominator, because year-end stock may be dressed.
How to read it
Rising turnover with stable gross margin is efficiency. Rising turnover with a collapsing margin can be discounting to clear stock. Falling turnover is cash trapped in the warehouse.
What to watch
A change in inventory valuation, or a shift to a consignment model, moves the ratio without a real change in the warehouse.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.