The inventory turnover ratio measures the number of times inventory has been turned over (sold and replaced) during the year. It is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices and inventory management. It is calculated by dividing total purchases by average inventory in a given period.
Assessing your inventory turnover is important because gross profit is earned each time such turnover occurs. This ratio can enable you to see where you might improve your buying practices and inventory management. For example, you could analyze your purchasing patterns as well as those of your clients to determine ways to minimize the amount of inventory on hand. You might want to turn some of your obsolete inventory into cash by selling it off at a discount to specific clients. This ratio can also help you see if your levels are too low and if you're missing out on sales opportunities.
Calculate and compare the inventory turnover ratio
cost of goods sold