What is Inventory turnover
The shortcoming of this ratio is that average calculation based on beginning and year-end inventory may not represent actual average in year. Other limitations in stock ratios are:
- Inclusion of obsolete stock
- Different stock valuation policies
Inventory turnover is reciprocal of inventory days
Cost of sales/Average inventory (number of times)
It demonstrates how quickly the inventory is being sold. It illustrates the liquidity of inventories, the higher the figure the quicker the inventory is sold.