Inventory Turnover Ratio Calculator
This calculator determines your Inventory Turnover Ratio, a key efficiency metric showing how many times a company has sold and replaced inventory during a period.
Enter your Cost of Goods Sold (COGS) and Average Inventory for the same period (e.g., a year or quarter). Ensure consistent units (e.g., USD, EUR).
Enter Financial Data
Understanding the Inventory Turnover Ratio
What is Inventory Turnover?
The Inventory Turnover Ratio measures how many times a company sells and replaces its inventory during a given period. It's an indicator of inventory management efficiency.
Formula for Inventory Turnover Ratio
The most common inventory turnover ratio formula is:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Interpreting the Ratio
In general:
- A high turnover ratio often indicates strong sales, effective inventory management, or potentially insufficient inventory (leading to stockouts).
- A low turnover ratio can suggest weak sales, excess inventory, poor inventory management, or obsolete stock.
The "ideal" ratio varies significantly by industry. Companies with perishable goods (like grocery stores) have very high turnover, while those with high-value, slow-moving items (like luxury cars or heavy machinery) have lower turnover.
How to Calculate Average Inventory
Average Inventory is usually calculated using the formula:
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Beginning Inventory is the value of inventory at the start of the period, and Ending Inventory is the value at the end. These figures come from the balance sheet.
Inventory Period (Days Sales of Inventory - DSI)
Related to inventory turnover is the Inventory Period, also known as Days Sales of Inventory (DSI). It tells you the average number of days it takes to sell off inventory.
Inventory Period (DSI) = Number of Days in Period / Inventory Turnover Ratio
(e.g., 365 days for annual data, 90 days for quarterly data)
Inventory Turnover Ratio Examples
Click on an example to see the calculation:
Example 1: Retail Clothing Store (Annual)
Scenario: A clothing store wants to know its inventory efficiency for the year.
Known Values: Annual COGS = $500,000, Average Inventory = $100,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $500,000 / $100,000
Result: 5.0 times.
Conclusion: The store turned over its inventory 5 times during the year.
Example 2: Grocery Store (Quarterly)
Scenario: A grocery store analyzing its inventory speed over three months.
Known Values: Quarterly COGS = $1,200,000, Average Inventory = $150,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $1,200,000 / $150,000
Result: 8.0 times.
Conclusion: The grocery store turned over its inventory 8 times in the quarter, which is typical for perishable goods.
Example 3: Manufacturing Company (Annual)
Scenario: A small furniture manufacturer reviews annual performance.
Known Values: Annual COGS = $800,000, Average Inventory = $250,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $800,000 / $250,000
Result: 3.2 times.
Conclusion: The manufacturer turned over its inventory 3.2 times. This ratio might be lower than retail due to production times and raw materials.
Example 4: Online Electronics Retailer (Annual)
Scenario: An online store specializing in electronics checks its annual turnover.
Known Values: Annual COGS = $2,500,000, Average Inventory = $500,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $2,500,000 / $500,000
Result: 5.0 times.
Conclusion: The online retailer turned over inventory 5 times. This is a reasonable rate for electronics.
Example 5: Car Dealership (Annual)
Scenario: A luxury car dealership analyzes its annual turnover rate.
Known Values: Annual COGS = $15,000,000, Average Inventory = $6,000,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $15,000,000 / $6,000,000
Result: 2.5 times.
Conclusion: The car dealership has a low turnover ratio of 2.5 times, which is expected due to the high cost and slower sales cycle of luxury vehicles.
Example 6: Bookstore (Annual)
Scenario: A local bookstore reviews its annual inventory efficiency.
Known Values: Annual COGS = $300,000, Average Inventory = $75,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $300,000 / $75,000
Result: 4.0 times.
Conclusion: The bookstore turned over its inventory 4 times during the year.
Example 7: Restaurant (Annual - Food Inventory Only)
Scenario: A restaurant focuses on the turnover of its perishable food inventory.
Known Values: Annual Food COGS = $400,000, Average Food Inventory = $20,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $400,000 / $20,000
Result: 20.0 times.
Conclusion: The restaurant has a high food inventory turnover (20 times), reflecting the perishable nature and frequent replenishment of food stock.
Example 8: Pharmaceutical Distributor (Quarterly)
Scenario: A pharmaceutical distributor checks its quarterly inventory speed.
Known Values: Quarterly COGS = $8,000,000, Average Inventory = $1,600,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $8,000,000 / $1,600,000
Result: 5.0 times.
Conclusion: The distributor turned over inventory 5 times in the quarter.
Example 9: Construction Supply Company (Annual)
Scenario: A company selling building materials reviews its annual performance.
Known Values: Annual COGS = $1,500,000, Average Inventory = $600,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $1,500,000 / $600,000
Result: 2.5 times.
Conclusion: The construction supply company turned over inventory 2.5 times, which is relatively low, possibly due to holding large, bulky, or specialized items.
Example 10: Small Craft Store (Annual)
Scenario: A small shop selling craft supplies evaluates its annual inventory management.
Known Values: Annual COGS = $120,000, Average Inventory = $40,000.
Formula: Inventory Turnover Ratio = COGS / Average Inventory
Calculation: $120,000 / $40,000
Result: 3.0 times.
Conclusion: The craft store turned over its inventory 3 times during the year.
Using the Inventory Turnover Ratio
The ratio is best used for comparison:
- Comparing a company's ratio over different periods (trend analysis).
- Comparing a company's ratio to competitors in the same industry.
- Comparing a company's ratio to industry benchmarks.
Significant deviations from industry averages or historical trends may warrant further investigation into sales, purchasing, or inventory storage practices.
Frequently Asked Questions about Inventory Turnover
1. What does the Inventory Turnover Ratio measure?
It measures how many times a company's inventory is sold and replaced over a specific period, indicating how efficiently inventory is managed.
2. What is the formula for the Inventory Turnover Ratio?
The basic formula is: Cost of Goods Sold (COGS) divided by Average Inventory for the same period.
3. Why use Cost of Goods Sold (COGS) instead of Sales Revenue?
COGS is preferred because both COGS and inventory values are recorded at cost. Sales revenue includes profit margin, making the comparison less direct.
4. How do I calculate Average Inventory?
The most common way is to add the value of inventory at the beginning of the period to the value at the end of the period and divide by two: (Beginning Inventory + Ending Inventory) / 2.
5. Is a high Inventory Turnover Ratio always good?
Not necessarily. While it can indicate strong sales and efficient inventory management, an excessively high ratio might mean the company isn't holding enough stock, leading to potential stockouts, lost sales, or increased costs from frequent, small orders.
6. Is a low Inventory Turnover Ratio always bad?
Generally, a low ratio suggests weak sales, overstocking, or possibly obsolete inventory. However, for certain industries with high-value, slow-moving goods, a lower ratio is typical.
7. How does the ratio vary by industry?
Significantly. Industries with perishable goods (groceries, food service) have very high turnover. Industries with durable, high-cost goods (automobiles, heavy machinery) have lower turnover. Benchmarking against industry peers is crucial.
8. What time period should I use for the calculation?
Use consistent periods for both COGS and Average Inventory, typically quarterly or annually. The average inventory should ideally be based on values representative of the period chosen (e.g., average of quarterly inventory levels for annual COGS).
9. How can a company improve its Inventory Turnover Ratio?
Improving the ratio (increasing turnover) can involve increasing sales, optimizing purchasing practices, improving forecasting, offering discounts to clear old stock, or implementing better inventory management systems.
10. What is the Inventory Period (Days Sales of Inventory)?
The Inventory Period (or DSI) is a related metric calculated as (Number of Days in Period / Inventory Turnover Ratio). It tells you the average number of days inventory is held before being sold.
