Inventory Turnover
Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory turnover measures how many times a company sells and replaces its inventory during a period. Higher turnover indicates efficient inventory management and strong sales, while low turnover may indicate overstocking or weak demand.
Inventory turnover measures how many times a company sells and replaces its inventory during a period. Higher turnover indicates efficient inventory management and strong sales, while low turnover may indicate overstocking or weak demand.
Inventory Turnover = Cost of Goods Sold / Average Inventory
Variables
Total cost of inventory sold during the period
(Beginning Inventory + Ending Inventory) / 2
Example Calculation
Scenario
Company STU has COGS of $800,000 and average inventory of $100,000.
Given Data
Calculation
Inventory Turnover = $800,000 / $100,000
Result
8 times
Interpretation
The company sold and replaced its inventory 8 times during the year. This means inventory sits for about 46 days on average (365/8) before being sold.
When to Use This Formula
- ✓Evaluating inventory management efficiency
- ✓Identifying slow-moving inventory
- ✓Comparing operational efficiency
- ✓Working capital analysis
Common Mistakes
- ✗Using revenue instead of COGS
- ✗Not using average inventory
- ✗Comparing across industries with different business models
FAQs
Common questions about this formula
It varies by industry. Grocery stores might have turnover of 12-15x (monthly turns), while jewelry stores might be 1-2x annually. Higher is generally better within an industry, but too high might mean stockouts.
COGS is used because inventory is recorded at cost, not selling price. Using revenue would inflate the ratio since revenue includes the profit margin. COGS provides an apples-to-apples comparison.
Divide 365 by the inventory turnover ratio. If turnover is 8 times per year, days inventory outstanding = 365 / 8 = approximately 46 days. This means on average, inventory sits for 46 days before being sold. Lower days outstanding indicates faster-moving inventory.
Common causes include overstocking, weak demand, poor product assortment, seasonal merchandise held too long, or purchasing errors. Low turnover ties up cash in unsold goods and increases storage costs, insurance, and the risk of obsolescence. Companies address this through markdowns, improved demand forecasting, or just-in-time purchasing.