Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into sales. Below is a discussion of what a high turnover ratio says about a company.

What Inventory Turnover Tells Investors

Intuitively, it makes sense that a retailer that is able to turn over, or sell, its inventory more often than a rival is a better operator. This characteristic generally holds true.

To learn more, check out "How do I calculate the inventory turnover ratio?"

One academic study that was first published in 2011 but updated in 2013, suggests that stronger inventory turnover figures can lead to outperformance. The paper is called Does Inventory Productivity Predict Future Stock Returns? A Retailing Industry Perspective and it estimated that investing in a select basket of retailing firms with the highest inventory turnover ratios and selling, or shorting a select basket of those with the lowest turnover ratios, performed well ahead of an industry benchmark.

The article considers inventory turnover as a pure form of inventory productivity. It also noted that it is correlated with a higher gross margin and sales surprise, meaning that firms with higher inventory turnover can also be more profitable and report sales ahead of what analysts and investors originally project. For these reasons, it can be a sign of a competitive advantage.

Other Considerations

Another article in the Harvard Business Review is titled Retailers Beware: Markets Punish Stores with Too Much Inventory and it detailed that there are optimal levels of inventory and told the best way to move it through a company’s system. Too much inventory that is sold too slowly can be a detriment, and the reverse is also true. It also noted the difference between selling high profit inventory more slowly and lower margin goods more quickly, which can both be beneficial if the right balance is found.

The Bottom Line

Managing inventory levels is important for most businesses and this is especially true for retailers and any company that sells physical goods.

  1. How do I calculate the inventory turnover ratio?

    The inventory turnover ratio is a key measure for evaluating how efficient management is at managing company inventory and ... Read Answer >>
  2. What does inventory turnover tell an investor about a company?

    Find out more about the inventory turnover ratio, what the ratio measures and what the inventory turnover ratio indicates ... Read Answer >>
  3. Which industries tend to have the most inventory turnover?

    Understand what inventory turnover measures and why it is good to have high inventory turnover. Learn what industries tend ... Read Answer >>
  4. Why is it sometimes better to use an average inventory figure when calculating the ...

    For a couple of key reasons, average inventory can be a better and more accurate measure when calculating the inventory turnover ... Read Answer >>
  5. How do you analyze inventory on the balance sheet?

    Learn how to analyze inventory using financial statements and footnotes by doing ratio analysis and performing qualitative ... Read Answer >>
  6. How do you find a company's days sales of inventory (DSI)?

    Discover the formula to calculate days sales of inventory and how it is helpful to market analysts and investors, but it ... Read Answer >>
Related Articles
  1. Investing

    AR & Inventory Turnover Is Key For These Sectors

    Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ...
  2. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  3. Investing

    Understanding Activity Ratios

    Activity ratios measure how effectively a business uses its assets.
  4. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  5. Investing

    Understanding Periodic Vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  6. Managing Wealth

    Understanding Turnover

    Turnover has a number of different, but related, meanings depending on the context in which it is used. Generally, it means the number of times an item is replaced with a new or similar version ...
  7. Investing

    3D Systems Corporations’ 4 Key Financial Ratios (DDD)

    Learn about the key ratios for analyzing 3D Systems and find out how analysts measure operational efficiency, growth potential and management performance.
  8. Small Business

    Understanding First In, First Out (FIFO)

    A company that uses the first in, first out inventory valuation method will sell, use, or dispose of assets that it produced or acquired first.
  9. Investing

    Tesla's 3 Key Financial Ratios (TSLA)

    Learn about Tesla Motors, Inc. and the company's key financial ratios, such as gross margin, operating margin and inventory turnover ratio.
  10. Investing

    Working Capital Works

    A company's efficiency, financial strength and cash-flow health show in its management of working capital.
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors ...
  2. Inventory Turnover

    Inventory Turnover is a ratio showing how many times a company's ...
  3. Average Age Of Inventory

    The average number of days it takes for a firm to sell to consumers ...
  4. Ending Inventory

    The value of goods available for sale at the end of the accounting ...
  5. Inventory Reserve

    An accounting entry that represents a deduction from earnings ...
  6. Holding Costs

    The associated price of storing inventory or assets that remain ...
Hot Definitions
  1. Wealth Management

    A high-level professional service that combines financial/investment advice, accounting/tax services, retirement planning ...
  2. Assets Under Management - AUM

    The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked ...
  3. Subprime Auto Loan

    A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official ...
  4. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  5. Federal Debt

    The total amount of money that the United States federal government owes to creditors. The government's creditors include ...
  6. Passive Management

    A style of management associated with mutual and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index. ...
Trading Center