What does "inventory turnover ratio" assess?

The inventory turnover ratio is a critical measure used to evaluate how efficiently a company manages its inventory. Specifically, it assesses how many times inventory is sold and replaced over a specified period, typically a fiscal year. A high ratio indicates that a company is selling merchandise quickly and efficiently, which can suggest strong sales performance or effective inventory management practices. Conversely, a low ratio might indicate overstocking, slow-moving inventory, or weak sales.

Understanding this ratio helps businesses optimize inventory levels, ensuring sufficient stock to meet demand while minimizing excess inventory costs. By focusing on how often inventory is turned over, companies can make informed decisions regarding purchasing, sales strategies, and production planning, ultimately impacting their bottom line.