How it’s calculated
Inventory turnover measures how many times an average stock of inventory is bought and sold during the period. Days’ sales in inventory shows how long, on average, goods sit before they are sold.
Example (OpenStax, The Spy Who Loves You Company, year 1): COGS 7,200; inventory 3,150 at the start and 8,955 at the end. Average inventory = 6,052.50, turnover = 7,200 ÷ 6,052.50 = 1.19 times, and days’ sales in inventory = 365 ÷ 1.19 ≈ 307 days.
Frequently asked questions
What is a good inventory turnover ratio?
It depends on the industry: grocers turn stock many times a year, furniture or jewelry stores far fewer. Compare with your own past periods and similar businesses.
Why use cost of goods sold instead of sales?
Inventory is carried at cost, so dividing cost of goods sold by inventory compares like with like. Using sales inflates the ratio by the markup.
What does a low inventory turnover mean?
Stock is selling slowly. That ties up cash and can point to overstocking or obsolete goods; very high turnover can mean stock-outs and lost sales.
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Sources
- Principles of Accounting, Volume 1, 10.5: Examine the Efficiency of Inventory Management Using Financial Ratios — OpenStax
- Principles of Finance, 6.2: Operating Efficiency Ratios — OpenStax
Formulas are taken from the free public references above. Results are provided “as is” for informational and educational purposes only. See our disclaimer.
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