What does inventory turnover measure?

Inventory turnover is a key metric that measures how quickly a firm sells its goods, reflecting the efficiency of inventory management and sales processes. A high inventory turnover ratio indicates that a company is selling its inventory rapidly, which can signal strong sales, effective marketing, and efficient inventory management. This metric is critical for businesses to assess how effectively they are converting their inventory into sales.

Understanding inventory turnover is essential for managing working capital and optimizing inventory levels. Companies with lower turnover might face issues such as excess stock, increased holding costs, or slow-moving goods, which can tie up cash and impact profitability. Therefore, the focus on how quickly a firm sells its goods illustrates the operational effectiveness of the business in reaching consumers and generating revenue.

The other options reflect different aspects of inventory but do not specifically measure the efficiency of sales relative to inventory levels. The number of inventory items on hand and the value of inventory at year-end pertain to inventory counts and balance sheet evaluation rather than sales effectiveness. The amount of inventory a firm sells, while related, does not capture the speed of sales relative to inventory on hand, which is the essence of inventory turnover.