Meaning and selection of the flow
Turnover ratios show how intensively a company uses particular resources during a period. Different calculations compare revenue, cost of sales or purchases with average assets, inventory or receivables and payables. The flow selected must match the balance being analyzed: there is no single formula for every type of turnover.
If a company increases sales while keeping the same average inventory, inventory turnover may rise. This is not always an improvement: an inventory balance that is too small can cause disruptions and lost orders. For a useful conclusion, consider whether prices, the product range and supply terms changed.
Limits of interpretation
Turnover is not profitability. Fast-selling goods can have a low margin, while slow-selling goods can have a high one. Use a comparable period and an average balance rather than a random balance at the reporting date. For a seasonal business, a simple average of the beginning and end of the year may sometimes be insufficient. Related reading: [peer comparison](/guides/peer-comparison/), [asset turnover](/glossary/oborachivaemost-aktivov/) and [inventory turnover](/glossary/oborachivaemost-zapasov/).