The inventory turnover ratio is a formula that displays how many times inventory is replaced over a period of time by dividing cost of goods sold over average inventory. This ratio is used to identify the efficiency of inventory management within a company.
An efficient company has a high inventory turnover ratio, indicating that the company does not overspend on inventory. A low inventory turnover ratio may imply that the company overspends on inventory and may be incurring unnecessary stocking and storage costs. This formula is often analyzed by both investors and creditors as inventory, especially for retail companies, is usually one of a company's largest assets.