Inventory Turnover Ratio Calculator



**This calculator is basic and does not work with commas; enter large numbers without commas.

Cost of Goods Sold:

Average Inventory:



Inventory Turnover Ratio =  

 


Inventory Turnover Ratio Formula


 

Inventory Turnover Ratio =

Cost of Goods Sold / Average Inventory

 

***Note: Average inventory is calculated by taking the beginning inventory (for example Jan 1) and the end inventory (Dec 31) and dividing by 2 to obtain the average.

For example, (Beginning Inventory + Ending Inventory) / 2.

 


What is Inventory Turnover Ratio?


Inventory turnover tells us how many times inventory turns throughout the period being analyzed. For efficiency in many aspects (i.e. cash flow, warehousing, shrinkage), a business should seek faster inventory turns. We use the average inventory rather than just the ending inventory because inventory is constantly moving (hopefully!) throughout any given period. For example, many companies start the year with new budgets and spend heavily in anticipation of the coming year. They may buy a large inventory for a given product, or multiple products, that will diminish as sales occur throughout the year. By year-end they may not have much inventory remaining in stock. If they were to use their ending inventory, it would inaccurately reflect inventory turns. Because of this, the average inventory is used in an attempt to capture the average.

 

Inventory Turnover Ratio Example


Shoeburger Corp, a fastfood company, sells burgers by the dozen. For the year end, Shoeburger reported cost of goods sold of $2,000,000 on their income statement (that's A LOT of burgers). Their beginning inventory on Jan 1 for the period reported was $1,000,000 and their ending inventory on Dec 31 was $1,500,000. First, we calculate the average inventory, as follows:

($1,000,000 + $1,500,000) / 2 = $1,250,000

 

Next, we calculate Shoeburger Corps inventory turnover ratio:

$2,000,000 / $1,250,000 = 1.6

What this tells us is Shoeburgers turnover ratio is 1.6. This means that their inventory turned 1.6 times during the year... this is just an example and given this is a fast food company we would expect inventory to turn much more than this... this is just for illustrative purposes! We would probably want to see at least 12 turns (inventory turnover at least once a month in this industry to avoid stale food, etc.).

Inventory Turnover Ratio Calculator (back to top of page)


 

In short, inventory turnover is a measure of how fast a business is selling inventory and it is typically compared with similar companies in a particular industry. Velocity is important for business as it generally means stronger sales, good forecasting, and it means reduced holding costs. However, it's important to note that a higher ratio could also indicate that a business doesn't have enough inventory, in which case the business is losing out on sales opportunities. In the retail industry turnover is critical, as quicker turnover means reduced costs in a lot of areas (i.e. warehousing, utilities, insurance, and shrinkage) and the reduced shelf space required for quicker turning products means more shelf space for other products.