What Is Inventory Turnover Ratio (ITR)?
Inventory Turnover Rate Definition
Inventory turnover rate (ITR) is a ratio measuring how quickly a company sells and replaces inventory during a given period.
The formula for calculating the inventory turnover rate is as follows:
For example, a company with $20,000 in average inventory with a COGS of $200,000 will have an ITR of 10.
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The Purpose of Inventory Turnover Rate
The purpose of calculating the inventory turnover rate is to help companies make informed decisions about pricing, manufacturing, marketing, and purchasing new inventory.
A low ratio can imply weak sales and/or possible excess inventory, also called overstocking.
This could be due to a problem with the goods being sold, insufficient marketing, or overproduction.
A high ratio can imply strong sales, but also insufficient inventory.
While strong sales are good for business, insufficient inventory is not.
Investors may also like to know the inventory turnover rate to determine how efficiently one company is performing against the industry average.
Define Inventory Turnover Rate in Simple Terms
The speed at which a company is able to sell its inventory is a crucial measurement of business performance.
The longer an item is held, the higher its holding cost will be, and so companies that move inventory relatively quickly tend to be the best performers in an industry.
Optimizing Inventory Turnover
Proper forecasting, efficient restocking, and effective marketing are few of the strategies to help increase inventory turnover. Discover more of them when you connect to a financial advisor in Wichita, KS or check out our financial advisor page if you don’t live locally.
What is Inventory Turnover Rate FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.