what can the inventory turnover ratio tell you 
inventory turnover measures how often a company replaces inventory relative to its cost of sales generally the higher the ratio the better a low inventory turnover ratio might be a sign of weak sales or excessive inventory also known as overstocking it could indicate a problem with a retail chain s merchandising strategy or inadequate marketing generally speaking a low inventory turnover ratio means the product is not flying off the shelf so demand for the product may be low a high inventory turnover ratio on the other hand suggests strong sales alternatively it could be the result of insufficient inventory as problems go ensuring a company has sufficient inventory to support strong sales is a better one to have than needing to scale down inventory because business is lagging a low inventory turnover ratio can be an advantage during periods of inflation or supply chain disruptions if it reflects an inventory increase ahead of supplier price hikes or higher demand retail inventories fell sharply in the first year of the covid 19 pandemic leaving the industry scrambling to meet demand during the ensuing recovery 2the speed with which a company can turn over inventory is a critical measure of business performance 3 retailers that turn inventory into sales faster tend to outperform comparable competitors the longer an inventory item remains in stock the higher its holding cost and the lower the likelihood that customers will return to shop the fast fashion business is an example competitors including h m and zara typically limit runs and replace depleted inventory quickly with new items slow selling items equate to higher holding costs there is also the opportunity cost of low inventory turnover an item that takes a long time to sell delays the stocking of new merchandise that might prove more popular a decline in the inventory turnover ratio may signal diminished demand leading businesses to reduce output 4inventory turnover and dead stockinventory turnover is an especially important piece of data for maximizing efficiency in the sale of perishable and other time sensitive goods examples include groceries fashion autos and periodicals an overabundance of cashmere sweaters for instance may lead to unsold inventory and lost profits especially as seasons change and retailers restock accordingly 5 such unsold stock is known as obsolete inventory or dead stock the inventory turnover ratio may one way of better understanding dead stock in theory if a company is not selling a lot of one product the cogs of that good will be very low since cogs is only recognized upon a sale therefore products with a low turnover ratio should be evaluated periodically to see if the stock is obsolete related inventory ratiosthe inventory to saies ratio is the inverse of the inventory turnover ratio with the additional distinction that it compares inventories with net sales rather than the cost of sales a higher inventory to sales ratio suggests that the company may be holding excess inventory relative to its sales volume meaning there may be inefficiencies in its inventory management a lower inventory to sales ratio implies that the company has a leaner inventory position relative to its sales which may reflect tighter control over inventory levels and or more efficient allocation of resources another ratio inverse to inventory turnover is days sales of inventory dsi marking the average number of days it takes to turn inventory into sales dsi is calculated as average value of inventory divided by cost of sales or cogs and multiplied by 365 companies tend to want to have a lower dsi and they usually want that dsi to be sufficient enough to cover short term cash needs limitations of the inventory turnover ratiothe inventory turnover ratio is a valuable metric for many companies however there s a bunch of downsides to consider some of the limitations of the inventory turnover ratio include example of an inventory turnover calculationfor fiscal year 2022 walmart inc wmt reported cost of sales of 429 billion and year end inventory of 56 5 billion up from 44 9 billion a year earlier 6 walmart s inventory turnover ratio for the year was 2022 429 billion 56 5 billion 44 9 billion 2 or about 8 5its days inventory equaled this was calculated as 365 8 5 or about 42 days this showed that walmart turned over its inventory every 42 days on average during the year fast forward to 2024 walmart reported cost of sales of 490 billion for the fiscal year ending january 2024 it also reported ending inventory of 54 9 billion as of 1 31 2024 down from 56 6 billion as of 1 31 2023 7 the inventory turnover ratio for 2024 was 2024 490 billion 54 9 billion 56 6 billion 2 or about 8 8this signals that from 2022 to 2024 walmart increased its inventory turnover ratio management should further explore the cause it may be due to more efficient processes or it may be due to more demand for the products it offers however very generally speaking the movement of this ratio from 2022 to 2024 appears to be positive special considerationsinventory turnover is only useful for comparing similar companies because the ratio varies widely by industry for example listed u s auto dealers turned over their inventory every 55 days on average in 2021 compared with every 23 days for publicly traded food store chains 8a relatively high inventory turnover ratio might indicate insufficient stocking that is costing the company sales while low inventory turnover could reflect bulk orders helping the company cut costs or preparations for a product launch rather than inefficient inventory management because the inventory turnover ratio uses cost of sales or cogs in its numerator the result depends crucially on the company s cost accounting policies and is sensitive to changes in costs for example a cost pool allocation to inventory might be recorded as an expense in future periods affecting the average value of inventory used in the inventory turnover ratio s denominator 9 as is the case with other financial ratios accounting practices do have an influence on results 