What does inventory turnover show?
Inventory turnover divides cost of goods sold by average inventory to show how often stock is renewed during a period.
Core indicators and business logic
High turnover can indicate strong sales and low capital tied up, but it may also signal insufficient stock. Low turnover can reflect weak demand, overbuying or obsolescence. Average inventory reduces distortion from temporary period-end movements. An indicator is not a conclusion by itself; it is read with industry, seasonality, company age and accounting method. The direction, speed and cause of change matter as much as the amount. Revenue, expense, cash and balance-sheet effects are examined separately.
Management decisions, monitoring and limits
The ratio is compared by product, season and industry because fresh food and durable machinery turn at different speeds. Inventory days translate turnover into a calendar measure. A turnover target can be harmful unless lost sales, waste, markdowns and service levels are monitored too. Management defines a baseline, owner, deadline and review frequency for each target. A one-month improvement is not permanent success; side effects on customers, workers, suppliers and finance are monitored. Decisions must explain both accounting records and real operations.