What Is Inventory Turnover?

Inventory turnover is a financial ratio showing how many times a company turned over your inventory relative to your Cost of Goods sold.

Ramsys calculates this over the last 12 months by getting the average total stock cost value over the last year and dividing it by the sum of the cost of goods sold.

Inventory Turnover=  Cost of goods sold in last 12 months / Average cost value of Inventory over last 12 months

Key purposes

• Inventory turnover measures how efficiently a company uses its inventory by dividing the cost of goods sold by the average inventory value during the period.
• Inventory turnover ratios are only useful for comparing similar companies, and are particularly important for retailers.
• A relatively low inventory turnover ratio may be a sign of weak sales or excess inventory, while a higher ratio signals strong sales but may also indicate inadequate inventory stocking.
• Accounting policies, rapid changes in costs, and seasonal factors may distort inventory turnover comparisons.

What Inventory turnover tells you

Inventory turnover measures how often a company replaces inventory relative to its cost of sales. Generally, the higher the ratio, the better.

A low inventory turnover ratio might be a sign of weak sales or excessive inventory, also known as overstocking. It could indicate a problem with your merchandising strategy, or inadequate marketing plan.

A high inventory turnover ratio, on the other hand, suggests strong sales. Alternatively, it could be the result of insufficient inventory. As problems go, ensuring a company has sufficient inventory to support strong sales is a better one to have than needing to scale down inventory because business is lagging