Inventory Turnover
BusinessGlossary term
Definition
A financial ratio that measures how many times a company sells and replaces its inventory over a specific period, indicating how efficiently the business manages its stock. A higher inventory turnover generally suggests strong sales and effective inventory management, while a low turnover may indicate overstocking or weak demand. It is calculated by dividing cost of goods sold by average inventory and is particularly important for retail and manufacturing businesses.
Related terms
- Balance SheetA financial statement that provides a snapshot of a company's financial position at a specific point in time, showing what the business owns (assets), what it owes (liabilities), and the owners' equity. The fundamental accounting equation states that assets must always equal liabilities plus equity. Reviewing a balance sheet helps investors and business owners assess the company's financial health, liquidity, and ability to meet its obligations.
- Working CapitalThe difference between a company's current assets (cash, accounts receivable, inventory) and its current liabilities (accounts payable, short-term debts), representing the funds available for day-to-day operations. Positive working capital indicates that a business can cover its short-term obligations and invest in growth, while negative working capital may signal financial trouble. Managing working capital efficiently is critical for maintaining liquidity and ensuring smooth business operations.
- RevenueThe total amount of money a business earns from selling its products or services before any expenses, taxes, or costs are deducted. Revenue is often referred to as the 'top line' because it appears at the top of the income statement. While revenue growth is important, it does not necessarily indicate profitability since a company can have high revenue but still operate at a loss if expenses exceed income.
- Cash Flow Statement (Business)A financial statement that tracks the actual movement of cash in and out of a business over a specific period, organized into operating, investing, and financing activities. Unlike the income statement, which includes non-cash items like depreciation, the cash flow statement shows whether a company is generating enough actual cash to fund operations and growth. Positive cash flow is essential for business survival, even for companies that appear profitable on paper.
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