Inventory turnover is a financial metric that measures the number of times a company’s inventory is sold and replaced within a specific period, typically a year. It indicates how efficiently a company manages its inventory and how quickly it is able to convert stock into sales.

Why is it important

Stock turnover is important because it provides insights into a company’s operational efficiency and helps assess its ability to generate revenue from its inventory. A high inventory turnover ratio generally signifies that a company is effectively managing its inventory by minimizing stock holding costs, reducing the risk of obsolete stock, and generating cash flow from sales. On the other hand, a low inventory turnover ratio may indicate inefficiencies, such as slow-moving or excess inventory, which can tie up capital and increase storage costs.

During difficult trading conditions, a high inventory turnover ratio becomes even more crucial for a company. Here’s how it can help:

Liquidity:

A higher Stock turnover ratio means a faster conversion of inventory into sales, which generates cash flow for the company. In challenging times, maintaining adequate liquidity is essential to meet financial obligations and manage operational expenses.

Reduced holding costs:

Holding stock involves costs such as storage, insurance, and potential obsolescence. By improving goods-in-trade, a company can minimize these costs, thereby improving profitability and reducing financial strain during difficult trading conditions.

Adaptability:

In uncertain economic environments, consumer preferences and market demand can change rapidly. A higher stock turnover allows a company to adapt more quickly to shifts in demand by ensuring that the right products are available when needed and minimizing the risk of holding excess or outdated stock.

How it is calculated:

The ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory value. The formula is as follows:

Inventory Turnover Ratio = COGS / Average goods-in-trade

To calculate the average inventory, you sum up the beginning and ending inventory for a specific period (e.g., a year) and divide the total by 2:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

To read more about inventory turn, go to

www.lido.app/metrics/inventory-turns

Note

Keep in mind that COGS represents the cost of the products sold during the period and can be obtained from the company’s financial statements or income statement.