Inventory Turnover Ratio

The inventory turnover ratio is an efficiency ratio that shows how many times a business sells through and replaces its average stock of inventory during a period, usually a year. It is calculated as:

Here $\text{Cost of goods sold}$ is taken from the income statement and $\text{Average inventory}$ is usually the opening balance plus the closing balance, divided by two.

Interpretation, industry benchmarks and the drivers of turnover are covered in the main entry on inventory turnover. As a quick example, a retailer with cost of goods sold of $3,600,000, opening inventory of $500,000 and closing inventory of $700,000 has average inventory of $600,000 and a turnover of 6 times. Dividing 365 days by 6 gives about 61 days, the figure reported as days sales in inventory or days inventory outstanding. Higher turnover generally means less cash tied up in stock, though too high a figure can signal stockouts. Because the ratio uses inventory values, the cost flow method and any write-downs affect it, so comparisons should be made between companies using similar methods. It is also a key input to the cash conversion cycle.