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.
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
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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.