An inventory turnover rate is a key business figure that indicates how often the average stock of an item is completely removed from the warehouse and replaced during a fiscal year. In other words, it records how often the inventory is turned over or sold off. The higher the inventory turnover rate, the more effectively the company’s capital is used, and the less capital is required.
The inventory turnover rate is calculated by dividing the number of departures from stock during a period by the average stock level. If, for example, a television set is sold twenty times in a financial year in an electronics store and an average of five televisions are in stock, the inventory turnover rate is: 20 ÷ 5 = 4.
Profoundly, the inventory turnover rate can also be used to derive the inventory range or the average storage period in days. The more frequent the stock turnover, the shorter the average storage period.
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