The inventory turnover ratio is a financial metric that measures how efficiently a company manages its inventory by dividing the cost of goods sold by the average inventory value during a specific period. A higher ratio indicates that a company is efficiently managing its inventory, which can lead to lower holding costs and potentially higher profits. Conversely, a lower ratio may be a sign of weak sales or excess inventory, which can lead to higher holding costs and potentially obsolete inventory.

The ideal inventory turnover ratio varies by industry, but for most industries, a ratio between 5 and 10 is considered good. This means that the company sells and restocks inventory roughly every one to two months. However, industries with perishable goods, such as florists and grocers, may have a higher ideal ratio to prevent inventory losses to spoilage.

Its important to note that a good inventory turnover ratio is not a one-size-fits-all metric, and businesses should calculate their own ratio to determine what is optimal for their specific industry and business. Additionally, inventory turnover ratios are only useful for comparing similar companies.