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.
There are a couple of ways to calculate inventory turnover. The two equations 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.
Industry Example: Grocery Stores
In sectors such as the grocery store industry, it is normal to have very high inventory turnover. According to CSIMarket, an independent financial research firm, the grocery store industry had an average inventory turnover of 16.45 for the first three quarters of 2018, which means the average grocery store replenishes its entire inventory over 16 times a year.
This high inventory turnover is largely due to the fact that grocery stores need to offset lower per-unit profits with higher unit sales volume. These types of low-margin industries have proportionately higher sales than inventory costs for the year.
In addition to high volume/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 to investors that the sector is a less risky prospect since companies within it replenish cash quickly and not get stuck with goods that can become obsolete or outdated.