Inventory turnover ratio : Meaning, Formula and Example

The inventory turnover shows how many times a company’s inventory is sold and replaced over a given period. Inventory turnover for a period can also be calculated as cost of goods sold over ending inventory for that period.

Cost of goods sold can also be used here to give a more accurate number but most companies use sales, which is inflated by the difference between retail price and Cost of goods sold. Using the inventory at a specific time may make the ratio less accurate. For the sake of comparison, it is better to use an average inventory, especially if the business is seasonal in nature.

Formula for Inventory turnover ratio

\[Inventory\,turnover\,ratio= \frac{{Sales}}{{Inventory}}\]

Example

Asian Paints has sales of Rs7,40,000 and inventory of Rs.26,200; this gives an inventory turnover ratio of 28.24. This means the company has sold 28.24 times of its inventory.