Inventory turnover ratio is showing how many times a company's inventory is sold and replaced over a period.
Iit is calculated as:
SALES WORTH/INVENTORY WORTH.
If your cost of goods sold during the period is $100 and your average finished products inventory during the month is $10, then your finished products inventory turnover ratio is 10 ($100 / $10 = 10). This implies that you are able to sell out your inventory ten times during the reporting period.
A high inventory turnover ratio indicates that the product is selling well
. If the value of the inventory turnover ratio is low, then it indicates that the management team doesn't do its job properly in managing inventories
.
The level of inventory that should be kept depends from one industry to another. For instance manufacturers and retailers should have a higher level of inventory, whereas software makers or advertising companies require lower levels of inventories.