A Turnover Ratio is a financial metric that measures how often a company's inventory is sold and replaced over a certain period of time. It is typically used to evaluate a company's efficiency in managing its inventory and generating sales.The turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory for a specific period, usually a year. The resulting number is then multiplied by 365 to express the ratio as the number of times per year that the inventory is sold and replaced.For example, if a company's COGS is $1,000,000 and its average inventory is $500,000, its inventory turnover ratio is 2. This means that the company's inventory is sold and replaced twice per year.A high turnover ratio indicates that a company is selling its inventory quickly and efficiently, which is generally considered to be a positive sign. It may indicate strong demand for the company's products and effective inventory management. On the other hand, a low turnover ratio may indicate weak demand for the company's products, poor inventory management, or excess inventory.However, it's important to note that turnover ratio should be analyzed in relation to the industry standards and the company's overall performance. The turnover ratio can vary from one industry to another and from one company to another.In summary, a turnover ratio is a financial metric that measures how often a company's inventory is sold and replaced, it is used to evaluate a company's efficiency in managing its inventory and generating sales, and is considered a good indicator of the company's overall performance.
