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Definition

Inventory Turnover is calculated as:

Inventory Turnover = Cost of goods sold / Average Inventory

Formula

Inventory Turnover = Cost of goods sold / Average Inventory

Explanation

Inventory Turnover measures how fast the company turns over its inventory within a year. A higher inventory turnover means the company has light inventory. Therefore the company spends less money on storage, write downs, and obsolete inventory. If the inventory is too light, it may affect sales because the company may not have enough to meet demand.

Beaware

Usually retailers pile up their inventories at holiday seasons to meet the stronger demand. Therefore, the inventory of a particular quarter of a year should not be used to calculate inventory turnover. An average inventory is a better indication.

Financial Dictionary

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