The average days to sell the inventory is calculated as follows:[1] A low turnover rate may point to overstocking,[2] obsolescence, or deficiencies in the product line or marketing effort.
However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.
Sales are generally recorded at market value, i.e. the value at which the marketplace paid for the good or service provided by the firm.
Additionally, firms may reduce prices to generate sales in an effort to cycle inventory.
Some computer programs measure the stock turns of an item using the actual number sold.