Inventory turnover measures how many times a company sells and replaces its inventory during a given period. It is a key efficiency metric for businesses that hold physical goods. High turnover indicates strong demand and efficient inventory management, while low turnover may signal overstocking, weak sales, or obsolete products.

The formula is: Inventory Turnover = Cost of Goods Sold / Average Inventory. Days sales of inventory converts this to days: DSI = 365 / Inventory Turnover, showing the average number of days it takes to sell through inventory. Retailers and grocery stores typically have high turnover (20-50x), while luxury goods and heavy equipment companies may have much lower turnover (2-4x).

For example, a company with $1,200,000 in COGS and $300,000 in average inventory has a turnover ratio of 4.0x, meaning it sells through its inventory four times per year. The DSI is 91.25 days, meaning on average each item sits in inventory for about three months before being sold. Improving this to 6.0x would reduce DSI to about 61 days, freeing up capital tied up in inventory.