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Inventory Turnover Ratio Calculator

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Examples

Example 1:
Calculate the annual Frobisher Industries inventory turnover ratio, when:

  • Annual cost of goods sold = $324,000.
  • Average value of inventory held during the year = $23,432.
  • Inventory turnover ratio = Cost of goods sold ÷ average inventory value = $324,000 ÷ $23,432 = 13.8 (Frobisher sold about 14 times the value of average inventory during the year.)

Example 2:
Calculate the inventory turnover ratio of Gelato! Gelato! when:

  • Annual cost of goods sold = $84,270
  • Inventory value at the beginning of the year = $9,865
  • Inventory value at the end of the year = $11,650
  • Average annual inventory value = ($9,865 + $11,650) ÷ 2 = $10,757.5
  • Inventory turnover = cost of goods sold ÷ average inventory value = $84,270 ÷ $10,757.5 = 7.8 (Gelato! Gelato sold about 8 times the value of its average inventory during the year)

Overview

Inventory turnover (also known as inventory turns, stock turns and stock turnover) is a measure of how efficiently a company manages its inventory. The ratio compares the cost of goods sold during a time period to the average inventory value during the same period.

The value of the cost of goods sold is obtained from the income statement of a business. Average inventory is calculated as the sum of the inventory at the beginning and end of the period divided by 2. The values of beginning and ending inventory are obtained from balance sheets at the beginning and end of an accounting period.

Analysis

In general, a higher inventory turnover value indicates better performance. A lower value indicates inefficient inventory control, over-stocking and increased inventory holding costs. A very high value of this ratio, however, might indicate loss of sales due to inventory shortages.

It’s dangerous to generalize, however. Inventory turnover values can be wildly different for different industries. Businesses that trade perishable goods have very higher turnover compared to those dealing in durable goods. So, comparisons would be fair only if they were made between businesses in the same industry.

Inventory Turnover = Cost of goods sold / Average inventory value