What does inventory turnover indicate?

Inventory turnover is a critical metric that reflects how efficiently a business is managing its inventory. The correct answer indicates that inventory turnover measures the number of times an average inventory is sold and replaced over a specific time period, typically a year. This measurement helps businesses understand how quickly they are moving their inventory and can indicate the effectiveness of their sales strategy and inventory management.

A high inventory turnover rate generally suggests strong sales or effective inventory management, meaning the company is selling products quickly and needs to replenish stock frequently. Conversely, a low turnover rate may indicate overstocking or inadequate sales, prompting the business to re-evaluate its inventory levels and sales strategies.

By assessing how many times inventory is sold, businesses can gain insights into their operational efficiency, sales performance, and demand forecasting. This information can guide purchasing decisions and overall business strategy to enhance profitability and reduce carrying costs associated with holding excess inventory.