Inventory Turnover
How many times inventory is sold per period.
Formula
Variables
Example
Higher = efficient
How it works
Inventory turnover compares the cost of inventory used up in a period with the average inventory held during that same period. It works because cost of goods sold reflects how much stock moved out of inventory, while average inventory shows how much stock was available on hand; dividing one by the other gives the number of full “cycles” of inventory sold and replaced. A higher ratio usually suggests faster-moving stock, while a lower ratio can indicate slow sales or excess inventory.
When to use it
Use this when analyzing how efficiently a business manages stock, especially in retail, wholesale, or manufacturing. It is helpful for comparing performance across periods or against similar companies to spot overstocking or understocking issues.
Worked example, step by step
A clothing retailer has cost of goods sold of $480,000 for the year. Its beginning inventory was $90,000 and ending inventory was $110,000. Average inventory = ($90,000 + $110,000) / 2 = $100,000 Inventory turnover = COGS / Avg Inventory = $480,000 / $100,000 = 4.8 Final answer: The inventory turned over 4.8 times during the year.
Common mistakes to avoid
- Using ending inventory instead of average inventory
- Putting sales revenue in the numerator instead of cost of goods sold
- Interpreting a higher turnover as always better without considering stock shortages
Did You Know?
High inventory turnover means goods fly off the shelves, the lifeblood of low-margin retailers.
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More in Accounting
View allAccounting Equation
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.