Inventory turnover ratio is a ratio showing how many times a company has sold and replaced inventory during a period. The company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. It is calculated as sales divided by average inventory. The speed with which a company can sell inventory is a critical measure of business performance.
Inventory turnover is a ratio that measures the number of times inventory is sold or consumed in a given time period. Also known as inventory turns, stock turn, and stock turnover, the inventory turnover formula is calculated by dividing the cost of goods sold (COGS) by average inventory.
Inventory, if not converted into sales fast, would mean money is locked in the business. Also, perishable goods may start deteriorating if inventory is not turned into sales fast.
This ratio would be high for FMCG companies whereas low for capital goods companies.
Inventory Turnover = Sales/ Inventory