What Is Inventory Turnover? Inventory turnover is a financial ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand.

Is a high inventory turnover ratio good?

Higher inventory turnover ratios are considered a positive indicator of effective inventory management. However, a higher inventory turnover ratio does not always mean better performance. It sometimes may indicate inadequate inventory level, which may result in decrease in sales.

What is the formula for the Inventory turnover ratio?

Formula for the Inventory Turnover Ratio. Inventory Turnover = Cost Of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) The calculation of inventory turnover can also be done by dividing total sales by inventory.

What is turnover ratio of cost of goods sold?

Inventory Turnover Ratio = (Cost of Goods Sold)/(Average Inventory) For example: Republican Manufacturing Co. has a cost of goods sold worth $5M for the current year. The company’s cost of beginning inventory was $600,000 and cost of ending inventory was $400,000.

Why is the total turnover ratio so important?

This ratio is important because total turnover depends on two main components of performance. The first component is stock purchasing. If larger amounts of inventory are purchased during the year, the company will have to sell greater amounts of inventory to improve its turnover.

Why do we use average inventory instead of COGs for inventory turnover?

Analysts divide COGS by average inventory, instead of sales, for greater accuracy in the inventory turnover calculation because sales include a markup over cost. Dividing sales by average inventory inflates inventory turnover. In both situations, average inventory is used to help remove seasonality effects. What Inventory Turnover Can Tell You