Net sales / Average inventory

Also known as Inventory Turnover, the sales to inventories ratio reflects the company's efficiency in managing inventory. A company usually needs to maintain a given level of inventory in order to maintain a given level of sales. This relationship varies widely from industry to industry.

A slow turnover rate might reflect overstocking, slow-moving or obsolete inventory, overestimation of sales, or inventory imbalance. Temporary problems such as a customer on strike may also be responsible. A higher than normal turnover rate might stem from under -investment in inventory which results in lack of proper customer service and a loss in sales.