What is Inventory Turnover?
Nexa Consultancy | Startup & Finance Glossary
Inventory Turnover is a key efficiency ratio that measures how many times a company has sold and replaced its inventory during a given period. It provides insight into how well a company is managing its stock and generating sales from its inventory.
For Startups: For D2C and manufacturing startups, a high inventory turnover ratio is generally a positive sign. It indicates strong sales and efficient inventory management, meaning less cash is tied up in slow-moving stock. A declining turnover ratio can be an early warning sign of slowing sales or overstocking, which can lead to cash flow problems.
Calculation: Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory.
Example: A company has a COGS of ₹2 Crore and an average inventory value of ₹40 Lakhs. Its inventory turnover is 5, which means it sold its entire inventory five times during the period.