Inventory turnover

How many times a company sells through its average inventory in a period.

DefinitionHow many times a company sells through its average inventory in a period.

Inventory turnover measures how quickly stock is sold and replaced. A higher turnover means less cash tied up on shelves and less risk of obsolete stock; a turnover that is too high can mean stockouts and lost sales.

How it is computed

Inventory turnover = cost of goods sold / average inventory, where average inventory is (opening + closing) / 2. Days inventory outstanding = days in the period / turnover.

Example

Annual cost of goods sold of $3,600,000, opening inventory of $500,000 and closing inventory of $700,000 give an average of $600,000 and a turnover of 6 times. That is about 365 / 6 = 60.8 days of inventory on hand.

Where it goes wrong

Using revenue instead of cost of goods sold in the numerator, which inflates turnover by the margin. A single company-wide figure also hides slow lines behind fast ones, so compute it by product or category. The full guide is inventory turnover ratio.

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