Inventory Turnover

Number of times a firm’s investment in inventory is recouped during an accounting period. Normally a high number indicates a greater sales efficiency and a lower risk of loss through un-saleable stock. However, an inventory turnover that is out of proportion to industry norms may suggest losses due to shortages, and poor customer-service. The preferred method of computing inventory turnover is to compare the cost of sales (also called Cost Of Goods Sold or COGS) to average inventory (Cost of sales ÷ Average inventory). Another method, which compares net sales revenue to the inventory (Net sales revenue ÷ Inventory) is also used but it introduces the distortion of sales markup that is not documented in the inventory records.