Certified Maintenance & Reliability Professional (CMRP) Practice Exam

What does the inventory turnover ratio indicate?

1. The number of times inventory is restocked in a period

2. The number of times the investment in inventory is recouped

3. The average time inventory remains in stock

4. The value of inventory issued

The correct answer is: The number of times the investment in inventory is recouped

The inventory turnover ratio is a key performance indicator that measures how effectively a business manages its inventory. Specifically, it indicates the number of times the investment in inventory is recouped during a specific period, typically a year. A higher ratio suggests that a company is selling its inventory more frequently, which can indicate good sales performance and efficient inventory management. This implies that the business is able to replenish its stock frequently and utilize its investment in inventory effectively. Understanding this ratio helps organizations assess their inventory management practices. A high turnover ratio can suggest strong demand for products, while a low ratio may indicate overstocking or decreased demand, potentially leading to obsolescence. It is an important metric used by management to make informed decisions regarding purchasing, production, and sales strategies.