– Inventory Management: Businesses use the ratio to optimize inventory levels and reduce carrying costs. – Financial Analysis: It is used by investors and analysts to assess a company’s financial health and efficiency. The Inventory Turnover Ratio is applied in various business contexts: – Industry Comparison: The interpretation may also depend on the industry, as some industries naturally have slower inventory turnover than others. – Low Ratio: A low ratio (e.g., below 2) implies slower inventory turnover, which may be due to overstocking, slow sales, or obsolete inventory. – High Ratio: A high ratio (e.g., above 5) indicates that inventory is sold quickly, suggesting efficient inventory management and strong sales.

The Inventory Turnover Ratio can be interpreted as follows: – Average Inventory is the average value of inventory held during the same period, typically calculated as (Beginning Inventory + Ending Inventory) / 2. – COGS represents the cost of goods sold during the period. Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory The formula to calculate the Inventory Turnover Ratio is: A high inventory turnover ratio indicates efficient inventory management, while a low ratio may suggest issues with overstocking or slow sales. It measures the number of times a company’s inventory is sold and replaced during a specific period, usually a year. The Inventory Turnover Ratio, also known as the Inventory Turnover or Stock Turnover Ratio, is a financial metric used by businesses to assess how efficiently they manage their inventory.

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Inventory turn rate