Inventory Turnover Ratio
Measures how many times a company sells and replaces its inventory during a given period, and how many days it takes on average to sell through stock.
What It Tells You
Inventory turnover reveals how efficiently a business manages its stock. A higher turnover ratio means inventory is selling quickly, which generally indicates strong demand and effective purchasing decisions. The complementary "days to sell" metric converts the ratio into an intuitive number of days.
When turnover is too low, a business may be carrying excess or obsolete inventory, tying up cash that could be deployed elsewhere. When turnover is unusually high, it could mean the company is understocking and potentially missing sales opportunities.
Components
- COGSCost of Goods Sold — the direct costs of producing or purchasing the goods that were sold during the period, including materials, direct labor, and manufacturing overhead.
- Average InventoryThe average value of inventory held during the period, typically calculated as (Beginning Inventory + Ending Inventory) / 2. This smooths out seasonal fluctuations.
- Days to SellAlso known as Days Sales of Inventory (DSI). Dividing 365 by the turnover ratio converts it into the average number of days it takes to sell the entire inventory.
Worked Example
Example: Retail Store
The store sells through its entire inventory roughly 6 times per year, taking about 61 days on average per cycle.
Why It Matters
Inventory is often the largest current asset on a company's balance sheet, and managing it well is critical to profitability and cash flow. High turnover generally means less money is tied up in warehouse shelves, reducing carrying costs such as storage, insurance, and spoilage.
Benchmarking inventory turnover against industry peers helps identify operational inefficiencies. A grocery store might turn inventory 15 times a year, while a furniture retailer might turn it only 4 times — both can be perfectly healthy within their respective industries.
Tracking turnover over time also helps spot trends. A declining ratio quarter over quarter could signal slowing demand, overbuying, or pricing issues that need attention before they erode margins.