What does the inventory turnover measure?

The inventory turnover measure is an important metric that evaluates how efficiently a company manages its inventory by assessing how quickly products are sold and replaced over a specific period. A high inventory turnover indicates that a company is effective in selling its goods, which can reflect strong sales or effective inventory management practices. Conversely, a low turnover may suggest overstocking, obsolescence, or weak sales.

This metric is crucial for businesses, especially those in retail, as it can impact cash flow, storage costs, and overall operational efficiency. Effective inventory turnover can lead to increased profitability, as it often signifies optimal stock levels and faster returns on investment.

Other options, while related to aspects of a company's performance, do not pertain to inventory turnover. Profitability assesses total earnings in relation to revenues and expenses, accounts payable efficiency concerns a company’s ability to manage its short-term debts, and the value of assets relative to liabilities reflects financial leverage rather than inventory management. Therefore, the measurement of how quickly a company sells its inventory is the correct focus of inventory turnover.