Legal Definitions - inventory-turnover ratio

The inventory-turnover ratio is a financial metric used in accounting to measure the effectiveness of a company's inventory management policy. It is calculated by dividing the cost of goods sold by the average inventory.

Let's say a company has a cost of goods sold of $500,000 and an average inventory of $100,000. The inventory-turnover ratio would be 5 ($500,000 ÷ $100,000).

This means that the company sells and replaces its entire inventory five times in a given period, which could be a year or a quarter. A high inventory-turnover ratio indicates that a company is efficiently managing its inventory and selling products quickly, while a low ratio suggests that a company may be holding onto too much inventory or struggling to sell its products.