What does the inventory turnover ratio indicate?

The inventory turnover ratio is a key indicator of how efficiently a business is managing its inventory. It demonstrates how many times a company's inventory is sold or used over a specific period, typically a year. A higher inventory turnover ratio suggests that a company is effectively converting its inventory into sales, indicating strong demand for its products and efficient inventory management practices.

This ratio is important because it helps businesses understand their sales performance and inventory management. When companies have too much inventory that isn’t selling, it can lead to increased holding costs, potential obsolescence, and cash flow issues. Conversely, a very high turnover might indicate that a company is understocked, which could result in lost sales opportunities.

In contrast, the other options relate to different aspects of supply chain and inventory management. While quality of products affects customer satisfaction and sales, it does not directly measure utilization of inventory. Average order size pertains to purchasing behavior rather than inventory efficiency. The cost of goods sold is crucial for understanding overall profitability but does not specifically illustrate how often inventory is cycled through in a given timeframe. Thus, the correct answer, indicating the number of times inventory is sold or used, captures the essence of inventory turnover effectively.