Ratio measuring how many times inventory is sold or used over a period relative to average inventory.
Inventory turnover is the ratio that measures how many times inventory is sold or otherwise moves through the business during a period relative to average inventory. It is often used as a quick indicator of inventory efficiency.
Low turnover can suggest overstocking, obsolete goods, weak demand, or poor purchasing discipline. Extremely high turnover can point to lean inventory management, but it can also signal stockout risk if inventory is too thin.
The common formula is:
\[ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \]
Average inventory is usually based on opening and closing inventory for the period. The interpretation depends on industry, product type, seasonality, and the reliability of the underlying inventory records.
Analysts often convert the result into approximate days inventory on hand:
\[ \text{Days Inventory on Hand} \approx \frac{365}{\text{Inventory Turnover}} \]
If beginning inventory is 110,000, ending inventory is 140,000, and cost of goods sold is 600,000, the calculation looks like this:
| Input | Amount |
|---|---|
| Beginning inventory | 110,000 |
| Ending inventory | 140,000 |
| Average inventory | 125,000 |
| Cost of goods sold | 600,000 |
| Inventory turnover | 4.8x |
| Approximate days inventory on hand | 76.0 days |
Higher turnover is not automatically better in every case. A company can improve turnover by carrying too little stock and then harming customer service or production continuity. The ratio also depends on inventory measurement quality, so weak counts or stale costing can make the number look cleaner than reality.