What does inventory turnover measure?

Inventory turnover measures the efficiency of a company in managing its inventory by indicating how many times stock is sold or utilized during a specific period. A higher inventory turnover ratio suggests that a business is effectively selling its inventory and is capable of replenishing it relatively quickly. This metric is crucial for businesses as it helps assess inventory management practices, cash flow, and overall operational efficiency.

In contrast, assessing the number of items in stock does not provide insight into sales efficiency, while inventory shrinkage involves loss of inventory that may not necessarily correlate with sales performance. Similarly, the total value of inventory is more about valuing the assets rather than how well the company converts those assets into sales. Enjoying a strong inventory turnover can lead to better revenue generation and can minimize holding costs associated with unsold merchandise.