Inventory Turnover

What Is Inventory Turnover?

Inventory turnover is a efficiency ratio that shows how often a company sells through its inventory during a set period, usually a year. A higher figure generally means products move off the shelves quickly, while a lower figure suggests stock sits unsold for longer. The ratio is most useful for businesses that hold physical goods, such as retailers, manufacturers, and wholesalers.

How It Is Calculated

The most common formula divides the cost of goods sold by average inventory:

Inventory Turnover = Cost of Goods Sold / Average Inventory

Average inventory is usually found by adding the beginning and ending inventory balances for the period and dividing by two. Using cost of goods sold rather than revenue keeps the comparison on a cost basis, because inventory is recorded at cost. Analysts often convert the result into days by dividing 365 by the turnover figure, which estimates how long, on average, stock is held before it is sold. This is sometimes called days inventory outstanding.

Why It Matters to Investors

Inventory turnover helps investors judge how well management is handling its stock. Strong turnover can point to healthy demand and tight control of working capital, since less cash is tied up in goods waiting to sell. Weak turnover may signal slowing sales, overstocking, or products at risk of becoming obsolete, which can later lead to markdowns and write-downs.

The ratio has limits. Turnover varies widely between industries, so grocers and fashion retailers should not be compared directly with heavy equipment makers. Seasonal businesses can show distorted figures if inventory is measured at a single point in time. Accounting methods such as first-in, first-out or last-in, first-out also affect the reported inventory value, so comparisons across companies work best when the methods are similar. Trends over several periods are usually more informative than a single reading.