What Is Inventory Turnover Ratio (ITR)?

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 29, 2023

Inventory Turnover Rate Definition

Inventory turnover rate (ITR) is a ratio measuring how quickly a company sells and replaces inventory during a given period. The formula for calculating the inventory turnover rate is as follows:

Inventory Turnover Rate

For example, a company with $20,000 in average inventory with a COGS of $200,000 will have an ITR of 10.

The Purpose of Inventory Turnover Rate

The purpose of calculating the inventory turnover rate is to help companies make informed decisions about pricing, manufacturing, marketing, and purchasing new inventory.

A low ratio can imply weak sales and/or possible excess inventory, also called overstocking.

This could be due to a problem with the goods being sold, insufficient marketing, or overproduction. A high ratio can imply strong sales, but also insufficient inventory.

While strong sales are good for business, insufficient inventory is not.

Investors may also like to know the inventory turnover rate to determine how efficiently one company is performing against the industry average.

Define Inventory Turnover Rate in Simple Terms

The speed at which a company is able to sell its inventory is a crucial measurement of business performance.

The longer an item is held, the higher its holding cost will be, and so companies that move inventory relatively quickly tend to be the best performers in an industry.

Inventory Turnover Rate (ITR) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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