Term · Cash Flow & Working Capital
Inventory Turnover
In briefInventory turnover shows how often the average inventory is sold and replaced per period. A falling value ties up capital and can point to excess inventory or sales problems. A very high value is not automatically good, as it can indicate excessively tight inventory. The metric is industry-dependent.
Definition
Inventory turnover indicates how often the average inventory is sold and replaced within a period. A high turnover suggests efficient use of inventory, a low one capital tied up or hard-to-sell goods. The metric is strongly industry-dependent.
How it is calculated
Formula. Inventory turnover = cost of goods sold ÷ average inventory
Why it matters for small caps
In capital-intensive small caps, a falling inventory turnover ties up liquidity and can point to sales problems or excess inventory. It is an early indication of impending inventory write-downs.
Common misreadings
- A very high inventory turnover is not necessarily positive: it can point to excessively tight inventory and resulting supply shortages.
In the process
Frequently asked
What does a falling inventory turnover mean?
Goods stay in the warehouse longer on average. This ties up capital and can point to weaker sales, excess inventory, or aging product ranges.
How does inventory turnover relate to working capital?
A low turnover increases the capital tied up in inventory and thus working capital, which draws liquidity from operations.
Why is an industry comparison important?
Typical turnover frequencies differ greatly, for example between food retail and mechanical engineering. The value is only meaningful when compared with peers and one's own history.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.