Inventory Turnover
Inventory turnover is an important part of managing inventory. This indicator, often called stock turnover, measures how much and how frequently a company’s inventory is sold, replaced, or used. This graph indicates how profitable a company is and whether any shortcomings need to be addressed. Consumer demand is important in determining whether inventory levels fluctuate quickly or not at all. Higher demand typically suggests that a company’s products and services will move quickly from the shelves to consumers’ hands, whereas low demand frequently results in a poor turnover rate.
A company’s inventory turnover is frequently stated as a ratio. The inventory ratio is calculated by dividing the cost of goods sold by the average inventory value. The inventory turnover ratio is computed using the following formula:
[Tex]Inventory~Ratio=\frac{COGS}{Average~Value~of~Inventory}[/Tex]
This data can be used by company management to make key decisions such as whether to continue manufacturing specific products and services or whether to handle difficulties that arise.
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