Inventory Turnover
How many times inventory is sold and replaced over a period.
Formula
Variables
Example
COGS $600k / avg inventory $100k = 6×
How it works
Inventory turnover measures how efficiently a business uses its stock by comparing the cost of items sold during a period with the average amount of inventory kept on hand. It works because COGS reflects the value of inventory that actually moved through sales, while average inventory represents the stock base that made those sales possible. A higher ratio usually means inventory is moving quickly; a lower ratio can suggest excess stock, slow sales, or overbuying.
When to use it
Use this formula when analysing retail, manufacturing, or wholesale businesses to judge stock efficiency and operating performance. It is also useful when comparing different periods or similar companies to see whether inventory management is improving or worsening.
Worked example, step by step
Step 1: Identify the values. COGS = $840,000 Average Inventory = $210,000 Step 2: Substitute into the formula. IT = COGS / Average Inventory IT = 840,000 / 210,000 Step 3: Calculate. IT = 4 Step 4: Interpret the result. The business turns over its inventory 4 times during the period.
Common mistakes to avoid
- Using ending inventory instead of average inventory, which can distort the ratio if stock levels change during the period
- Dividing sales revenue by inventory instead of COGS, which changes the meaning of the result
- Treating a high turnover as always good without checking whether it causes stock shortages or lost sales
Did You Know?
Dividing 365 by the turnover gives “days inventory outstanding” — the average shelf time of stock.
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BasicThe foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.
Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
Gross Profit
BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
Net Income
BasicThe “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
Retained Earnings
BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.