Inventory Turnover

Inventory turnover compares how much inventory was used up through sales against the average amount kept on hand. Because COGS measures the cost of items that were sold, dividing it by average inventory shows how many inventory-equivalents were cycled through during the period. A higher ratio generally means stock is moving faster, while a lower ratio can signal slow-moving goods or excess inventory.

Use this when you want to judge how efficiently a business manages stock, especially in retail, wholesale, manufacturing, or distribution. It is also useful for comparing performance across periods or between similar companies with different inventory levels.

• Using sales revenue instead of cost of goods sold
• Dividing by ending inventory instead of average inventory
• Interpreting a higher turnover as always better without considering stockouts or demand