Inventory Turnover
Inventory Turnover
Cost of goods sold divided by average inventory. Measures how many times inventory is sold and replaced over the year.
When to use: Use to gauge inventory-management efficiency. Higher = faster-moving inventory and less working capital tied up. Compare across firms in the same industry; absolute levels vary widely (groceries can run 20+, jewelers 1–2).
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| InvTurn | Inventory Turnover | COGS / average inventory | integer |
| COGS | Cost of Goods Sold | Annual cost of goods sold | $ |
| Inventory | Average Inventory | Representative average balance over the same period as the numerator | $ |
Real-Life Examples
Example 1: Mid-Cap Retailer
COGS $1.2B, average inventory $200M.
Given
Step-by-Step
Turnover of 6.0 — inventory cycles through 6 times per year, or every ~60 days. Reasonable for general retail; slow for groceries, fast for furniture.
Frequently Asked Questions
Both are used in practice. COGS is more precise (matches the cost basis of inventory). Sales-based turnover overstates the figure but is reported when COGS isn't available. This formula uses COGS — the textbook standard.
Because year-end inventory is a snapshot that may not reflect typical levels. Average inventory = (beginning + ending) / 2 smooths out seasonality and one-time effects. For more precision, use a 12-month average.