Measure how many times inventory is sold and replaced over a period.
Inventory turnover = COGS ÷ average inventory. Days in inventory = 365 ÷ turnover ratio.
Inventory turnover ratio measures how many times a business sells and replaces its stock over a period, and most guidance treats a higher number as unambiguously good — but that's only true up to a point. For most industries, a ratio between roughly 5 and 10 (selling and restocking every one to two months) is considered healthy, though the right benchmark varies enormously by industry: fast-moving retail often runs 8-10, healthcare balances availability against regulation at 3-5, and luxury goods or industrial parts with long replacement cycles can sit at just 1-2 and still be entirely normal for that business model.
An unusually high turnover ratio — often anything in the double digits for a business that isn't in an inherently fast-moving category — can actually be a warning sign rather than an achievement: it frequently means inventory levels are stretched too thin, increasing the risk of stockouts and lost sales while new stock is in transit, effectively capping revenue to fit an undersized inventory buffer. On the other end, a low turnover ratio suggests inventory is moving more slowly than expected — caused by excess stock, weak demand, inaccurate forecasting, or simple over-ordering — which ties up working capital in unsold goods and increases carrying costs (storage, insurance, obsolescence risk) the longer that inventory sits. The right way to use this number isn't chasing a universally "good" figure, but comparing your own ratio against your specific industry's typical range and against your own historical trend, since a sudden change in either direction usually signals something worth investigating before it becomes a bigger problem.
For most industries, 5-10 is a healthy range, meaning stock is sold and restocked every one to two months. But the right benchmark varies enormously by industry — fast retail often runs 8-10, healthcare sits at 3-5, and luxury or specialized industrial goods can be entirely healthy at just 1-2 due to their inherently slower, higher-value sales cycle.
Yes — an unusually high ratio, often double digits for a business outside a naturally fast-moving category, can signal inventory levels are too thin. This raises the risk of stockouts and lost sales while replacement stock is in transit, effectively capping how much revenue the business can generate.
That inventory is moving more slowly than expected — commonly caused by excess stock, weak demand, inaccurate sales forecasting, or simple over-ordering. This ties up working capital in unsold goods and increases carrying costs like storage, insurance and obsolescence risk the longer that stock sits unsold.
Your own industry, always. A ratio of 2 might be a red flag for a fast-moving retail business but entirely normal for a luxury goods or industrial parts business. Comparing your ratio against your specific industry's typical range, and tracking it against your own historical trend, gives a far more meaningful read than chasing a single universal 'good' number.