What does the inventory turnover ratio measure?

The inventory turnover ratio primarily measures the liquidity of inventory, indicating how efficiently a business is managing its stock. This ratio calculates how many times inventory is sold and replaced over a specified period, usually a year. A higher inventory turnover indicates that a company is selling goods quickly, which is a sign of strong sales and effective inventory management. Conversely, a low turnover rate may suggest overstocking or issues with sales performance, potentially tying up capital in unsold products.

Understanding the liquidity of inventory is crucial for businesses, as it helps in assessing how quickly assets can be converted into cash. This can influence purchasing decisions, cash flow management, and overall operational efficiency. An effective inventory turnover strategy contributes to maintaining the right amount of inventory to meet customer demand without incurring unnecessary holding costs.