A:

The industries that tend to have the most inventory turnover are those with high volume and low margins, such as retail, grocery and clothing stores. Inventory turnover measures the rate at which a company purchases and resells its products to its consumers. The two equations for inventory turnover are as follows:

Inventory turnover = sales / inventory

Inventory turnover = cost of goods sold / average inventory

For example, if a company has a yearly inventory amount of $100,000 and a yearly sales amount of $1 million, its inventory turnover is 10. This means that over the course of the year, the company effectively replenished its inventory 10 times.

In industries such as the grocery store industry, it is normal to have very high inventory turnover. According to CSIMarket, the grocery store industry had an average inventory turnover of 18.56, which means the average grocery store replenishes its entire inventory close to 19 times a year. This high inventory turnover is largely due to the fact that low-margin industries such as the grocery store industry need to offset lower per-unit profits with higher unit sales volume. These types of industries have proportionately higher sales than inventory costs for the year.

In addition to high volume and low margin industries needing a higher inventory turnover to remain cash-flow positive, a high inventory turnover can also signal an industry as a whole is enjoying strong sales or has very efficient operations. It is also a signal the industry is less risky since the industry as a whole can replenish its cash quickly and is not stuck with inventory that can become obsolete or outdated.

RELATED FAQS
  1. How should I use portfolio turnover to evaluate a mutual fund?

    Learn about the turnover rate for mutual funds, and understand the effect higher turnover may have on fund performance and ... Read Answer >>
  2. What do efficiency ratios measure?

    Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >>
  3. Does working capital include inventory?

    Learn about inventory that is part of current assets and working capital, which is the difference between current assets ... Read Answer >>
  4. How can a company raise its asset turnover ratio?

    Find out more about the asset turnover ratio, what it measures, how to calculate the ratio and how a company could increase ... Read Answer >>
  5. How is asset turnover calculated?

    Learn what the asset turnover ratio is, how it can be used to compare companies in the same sector, and how the ratio is ... Read Answer >>
  6. Why are efficiency ratios important to investors?

    Learn about efficiency ratios, such as the asset turnover ratio, and why these metrics are important to investors when analyzing ... Read Answer >>
Related Articles
  1. Investing

    Measuring Company Efficiency To Maximize Profits

    Efficiency ratios can provide indications of profitability, shows how efficiently a company is being managed, utilizes its assets and handles liabilities.
  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

    How to Calculate Average Inventory

    Average inventory is the median value of an inventory at a specific time period.
  4. Investing

    Turnover ratios and fund quality

    Learn why the turnover ratios are not as important as some investors believe them to be.
  5. 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.
  6. Investing

    Understanding Periodic vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  7. Trading

    Seven Emerging Currencies Challenging The Forex Hierarchy

    While the top-seven currencies follow a somewhat stable hierarchy, second-tier currencies can be all over the map.
  8. 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.
RELATED TERMS
  1. Days Sales Of Inventory - DSI

    The days sales of inventory value (DSI) gives investors an idea ...
  2. Beginning Inventory

    Beginning inventory is the book value of inventory at the start ...
  3. Average Inventory

    Average inventory is a calculation that estimates the value or ...
  4. Turnover Ratio

    Turnover ratio depicts how much of a portfolio has been replaced ...
  5. Working Capital Turnover

    Working capital turnover is a measurement comparing the depletion ...
  6. Share Turnover

    Share turnover is a measure of stock liquidity, figured by dividing ...
Trading Center