What Does the Inventory Turnover Ratio Tell You About the Company?

A company’s inventory turnover ratio refers to how quickly goods enter and leave storage at the business. It’s most often used in relation to companies that deal in perishable goods, such as foodstuffs, or high-demand retail items. It’s easy to calculate in theory, but it’s not always easy to interpret.


You can calculate a company’s inventory turnover ratio by dividing the cost of goods sold by the value of its inventory. This inventory figure can either be averaged over a period of time such as a year, or it can refer to one particular time, giving a snapshot.

Low Ratio

A company’s inventory turnover ratio can give you an idea of how well it manages its resources. If its ratio is very low, it may mean the company has much more inventory than it really needs at any one time. Therefore it has too much of its capital tied up in goods or raw materials that it will take a long time to sell or make a profit on. Generally speaking, a business with high profit margins on its finished goods can worry less about a low turnover ratio.

High Ratio

A high inventory turnover ratio is a little harder to interpret. It could mean the company has had unexpectedly strong sales -- a good sign. Or it could mean the firm is not managing its buying as well as it might and is having difficulty in administering its inventory.


You can track inventory turnover ratio change over time to see whether a company’s turnover is going up or down significantly. However, you would need more information about the company itself and its circumstances to determine what this meant about its sales or financial health. Seasonal factors, such as weather or consumers’ buying habits, can lead to swings in inventory turnover. Desirable turnover ratios may be different in different industries.