Turnover Ratio Calculator
The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing the cost of goods sold with average inventory for a period. This measures how many times the average inventory is “turned” or sold during a period, i.e. a company with $1,000 of average inventory and sales of $10,000 effectively sold its 10 times over.
The inventory turnover ratio is calculated by:
Inventory turnover = Cost of goods sold / Average inventory
Average inventory = (Beginning + ending inventory) / 2
Inventory Turnover Interpretation
Generally speaking, the quicker a business turns over its inventories, the better. The lower number (compare with the previous period or your competitors) suggests a problem with inventory control. Stock turnover varies from industry to industry. In some cases, holding more stock may improve customer service and allow the business to meet demand.
Inventory turnover is a ratio that helps us to answer questions like “have we got too much money tied up in inventory?”
- If larger amounts of inventory are purchased during the year, the company will have to sell greater amounts of inventory to improve its turnover.
- If the company can’t sell these greater amounts of inventory, it will incur storage costs and other holding costs.