Final answer:
The inventory turnover ratio measures how many times a company's inventory is sold and replaced over a period, indicating inventory management efficiency. It is calculated using the formula: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory.
Step-by-step explanation:
The inventory turnover ratio is a measure that indicates the number of times a company sells and replaces its stock of goods during a certain period. It is a critical efficiency ratio that helps businesses understand how well they manage their inventory. The higher the ratio, the more efficient the company is at managing its stock.
The formula to calculate the inventory turnover ratio is:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Where Cost of Goods Sold (COGS) refers to the total cost of goods that have been sold over a period, and Average Inventory is the mean value of inventory held by a company during the period -- calculated by adding the beginning and ending inventory for the period and dividing by two.