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Stock Turnover Ratio

Stock Turnover Ratio: A measure of how many times a company's inventory is sold and replaced over a given period of time.

The stock turnover ratio is a crucial measure of a company's inventory management efficiency. It indicates how quickly a company is able to sell and replace its inventory over a specific period, such as a month, a quarter, or a year. The formula for calculating the stock turnover ratio is:

Stock Turnover Ratio = Cost of Goods Sold / Average Inventory

The cost of goods sold (COGS) is the total cost of the products that a company has sold during a given period, while the average inventory is the average value of inventory held during the same period.

A high stock turnover ratio indicates that a company is selling its inventory quickly, which can be a positive sign as it suggests that the company is able to generate cash flow and avoid holding excess inventory. On the other hand, a low stock turnover ratio suggests that a company is holding too much inventory, which can lead to increased carrying costs, waste, and obsolescence.

The ideal stock turnover ratio varies by industry and depends on factors such as the company's sales cycle and the type of inventory it holds. For example, a company that sells perishable goods like food or fashion items with short product life cycles should have a higher stock turnover ratio compared to a company that sells durable goods like furniture or equipment with longer product life cycles.

Therefore, by measuring and monitoring its stock turnover ratio, a company can identify opportunities to improve its inventory management and optimize its profitability.