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Simple English definitions for legal terms
inventory-turnover ratio
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A quick definition of inventory-turnover ratio:
Inventory-Turnover Ratio: The inventory-turnover ratio is a way to measure how well a company is managing its inventory. It is calculated by dividing the cost of goods sold by the average inventory. This helps companies understand how quickly they are selling their inventory and if they need to adjust their inventory management policies.
A more thorough explanation:
The inventory-turnover ratio is a financial metric used in accounting to measure the effectiveness of a company's inventory management policy. It is calculated by dividing the cost of goods sold by the average inventory.
Let's say a company has a cost of goods sold of $500,000 and an average inventory of $100,000. The inventory-turnover ratio would be 5 ($500,000 ÷ $100,000).
This means that the company sells and replaces its entire inventory five times in a given period, which could be a year or a quarter. A high inventory-turnover ratio indicates that a company is efficiently managing its inventory and selling products quickly, while a low ratio suggests that a company may be holding onto too much inventory or struggling to sell its products.