Inventory turnover ratio measures how efficiently a company uses its inventory by dividing the cost of goods sold by the average inventory value during a set period.
Inventoryturnover, or the inventoryturnoverratio, is the number of times a business sells and replaces its stock of goods during a given period. It considers the cost of goods sold, relative to its average inventory for a year or for any set period of time.
Simply put, the inventory turnover ratio measures the efficiency at which a company can convert its inventory purchases into revenue. The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory balance for the matching period.
To find your inventory turnover ratio, use this formula: Inventory turnover ratio = Cost of goods sold ÷ Average inventory. A higher ratio means your products sell quickly or you’re keeping inventory lean. A lower ratio suggests sluggish sales, too much stock on hand, or both.
Inventoryturnover is the rate at which you sell and replace inventory within a given period of time. The basic calculation is the cost of goods sold (COGS) divided by average inventory: Cost of Goods Sold (COGS) / Average Inventory Cost = InventoryTurnover. Want to skip the math?
Inventoryturnover is usually calculated as Cost of Goods Sold (COGS) divided by Average Inventory. In other words, it’s the number of times your business “turns over” its inventory in a given period. For example, a turnoverratio of 6 means that on average, you sold all your inventory six times during the year.
As shown in the example above for ABC Company, you would calculate the inventoryturnoverratio by dividing $40,000 (COGS amount) by $15,000 (average inventory) for a total of 2.67. Essentially, ABC Company turns over its inventory almost three times in a given period. $40,000 ÷ $15,000 = 2.67.
Learn what the inventoryturnoverratio is and how to calculate it. Understand its importance in assessing inventory efficiency and improving business profitability.
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory. A higher ratio indicates more rapid inventory movement and better operational efficiency. A ratio of 6 means you've sold and replaced your entire inventory six times during the year. Monitoring this ratio delivers several business benefits:
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Inventory turnover ratio measures how efficiently a company uses its inventory by dividing the cost of goods sold by the average inventory value during a set period.