What does the inventory turnover ratio measure?

The inventory turnover ratio is a key financial metric that indicates how efficiently a company manages its inventory. It specifically measures the number of times a company sells and replaces its inventory over a specific period, typically a year.

The correct answer involves calculating this ratio as the cost of goods sold divided by average inventory. This calculation provides insight into how well inventory is being utilized to generate sales. A higher inventory turnover ratio suggests that a company is selling its inventory quickly, which can indicate strong sales or effective inventory management. Conversely, a lower ratio might suggest overstocking or inefficiencies in moving products.

In contrast, the other options do not provide the correct definition of the inventory turnover ratio. While average inventory held throughout the year and other calculations involving net income and total sales can be useful for various analyses, they do not directly determine how efficiently a company turns its inventory into sales. Hence, focusing on the relationship between cost of goods sold and average inventory is the correct and relevant approach in defining the inventory turnover ratio.