Certified Government Financial Manager (CGFM) 2025 – 400 Free Practice Questions to Pass the Exam

The inventory turnover ratio is a key financial metric that measures how efficiently a company manages its inventory. It indicates how many times inventory is sold and replaced over a specific period, typically a year. A higher inventory turnover ratio suggests that a company is able to quickly sell its stock, which can minimize the risk of loss related to inventory issues, such as obsolescence or spoilage. This efficiency in managing inventory is crucial for maintaining profitability and operational effectiveness, as it reflects inventory management practices and the demand for the company's products.

The other options, while important in their own realms, do not align with the specific focus of the inventory turnover ratio. For example, tax collection efficiency pertains to revenue performance and compliance, budgeting effectiveness relates to financial planning and resource allocation, and debt management capability is about a company's ability to service its liabilities. Each of these areas addresses different aspects of financial performance and management, but they do not directly connect to how inventory is handled, which is the essence of what the inventory turnover ratio evaluates.