Inventory turnover ratio measures how many times a business sells and replaces its inventory in a period — calculated as COGS divided by average inventory. Higher turnover generally means greater efficiency and lower carrying costs.
Inventory turnover = Cost of Goods Sold / Average Inventory (where Average Inventory = (Beginning Inventory + Ending Inventory) / 2). It answers: 'How many times did we sell through our entire inventory stock this year?' A ratio of 6 means the business turns over its inventory six times per year — approximately every 60 days. The companion metric, Days Sales of Inventory (DSI), converts the ratio to days: DSI = 365 / Inventory Turnover. An inventory turnover of 6 → DSI of ~61 days. Businesses aim to minimize DSI because inventory sitting in a warehouse ties up capital, risks obsolescence, and incurs carrying costs (storage, insurance, financing). Benchmarks vary enormously by industry. Grocery stores and fast-casual restaurants may turn inventory 20+ times per year (high perishability, rapid cycle). Manufacturing and retail average 4–8 turns. Luxury goods, specialty equipment, and industrial supplies may turn inventory 2–4 times annually. Comparing inventory turnover against industry benchmarks (available from sources like the Federal Reserve's G.17 release and trade associations) is more meaningful than evaluating in isolation. For asset-based lending and inventory financing, lenders calculate inventory turnover to assess liquidation value and staleness risk. Fast-turning inventory is more lendable than slow-turning inventory — a lender advancing against $500K in grocery inventory (turning 20× per year) faces less risk than advancing against $500K in specialty equipment parts (turning twice per year). Lenders typically advance 40–60% of eligible inventory value.
It depends on the industry. Grocery and food service: 20–52× is healthy. General retail: 4–8×. Manufacturing: 3–6×. The key is comparing against industry peers, not an absolute number. Turnover consistently below industry average signals overstocking, slow-moving product, or obsolescence risk.
Yes — very high turnover (relative to industry) can signal stockouts: the business is selling out before replenishing, losing sales and customer goodwill. For growing businesses, rapidly rising turnover may mean supply chain can't keep up with demand. Target optimal turnover: high enough to minimize carrying costs, low enough to prevent stockouts.
Asset-based lenders and inventory financiers use turnover to assess eligibility and advance rates. Fast-turning inventory is more liquidatable and less risky — lenders advance more against it. Slow-turning or aging inventory may be excluded from the borrowing base or receive lower advance rates (30–40% vs. 50–60% for fast-moving goods).