Definition (canonical)
Inventory turnover measures how many times a company sells and replaces its stock over a period: inventory turnover = cost of goods sold / average inventory. It shows how efficiently capital tied up in stock is converted into sales. A higher turnover means inventory moves fast and less cash sits on shelves; a low turnover warns of overstocking, weak demand, or obsolescence.
What high and low turnover mean
Turnover is really a cash story. Every unit sitting in a warehouse is money frozen — not earning, at risk of spoilage or markdown. High inventory turnover frees that cash, shortens the cash cycle and lowers storage and obsolescence costs, which is why it sits at the heart of working capital management. But turnover that is too high can mean chronic stockouts and lost sales. Low turnover ties up cash and often hides dead stock that will eventually be written down. The right level balances availability against the cost of holding — it is judged against the cost of goods sold, not revenue, because inventory is carried at cost.
Days inventory outstanding
Turnover is often restated as days: days inventory outstanding (DIO) = 365 / inventory turnover. A turnover of 6 means roughly 61 days of stock on hand. DIO is more intuitive for operations and plugs directly into the cash conversion cycle (DIO + days sales outstanding − days payable outstanding). Reading turnover and DIO together against the balance sheet shows how much of the company's liquidity is locked in stock versus available to operate.
Benchmarks and limits
Norms vary hugely: grocery and fast fashion turn 10–15+ times a year, industrial and specialty goods far less. Compare only within an industry and watch the trend. Two cautions: use average inventory (opening + closing) / 2 to avoid seasonal distortion, and remember a single ratio hides mix — one slow, obsolete product line can be masked by fast movers. Pair the number with an aging analysis for the real picture.
FAQ
What is a good inventory turnover? It depends on industry — grocery turns 10–15+, heavy industry far less. Compare with peers and track the trend, not a single figure.
Why use COGS, not revenue? Because inventory is recorded at cost; using revenue would mix in margin and overstate turnover.
What does low turnover indicate? Overstocking, weak demand or obsolete stock — cash tied up and risk of future write-downs.
How does it relate to days of inventory? Days inventory outstanding = 365 / turnover; a turnover of 6 is about 61 days of stock.
Related: Working capital · COGS · Balance sheet Reviewed: 2026-08-02 · Sources: operations & finance canon