Introduction
Inventory Turnover measures how quickly a company sells its inventory. A high turnover indicates efficiency; Low indicates stagnant inventory or over-production.
Explanation
Inventory Turnover answers: "How many times a year do we sell all of our inventory?" Walmart rotates inventory 8-9×/year (every 40 days). Luxury car dealer 2×/year (every 6 months).
Formula
Inventory Turnover = Cost of Sales / Average Inventory
Example
Walmart vs Luxury Brand: - Walmart: COGS $400B, Inventory $50B → Turnover = 8× (45 days) - Luxury Cars: COGS $1B, Inventory $500M → Turnover = 2× (182 days)
How to read it
Turnover > 10× = very efficient (food, commodities). 5-10× = good (general retail). 2-5× = moderate (electronics, furniture). < 2× = slow (luxury, industrial equipment). Declining turnover = inventory moving slower, possible overstock or products not selling. Excessively high turnover can indicate stock-outs and lost sales.
Key takeaways
- Inventory Turnover = COGS / Average Inventory
- Measures inventory turnover speed
- Turnover > 10× = very efficient
- Turnover < 2× = slow
- Declining = overstock or weak sales
- Excessively high = possible stock-outs