This measurement shows how easily a company can turn its inventory into cash. While you shouldn’t base decisions solely on this information, high turnover is usually ideal because it indicates that a company is doing a good job of managing its stock. If sales are down or the economy is under-performing, it may manifest as a lower inventory turnover ratio. The formula for the inventory turnover ratio measures how well a company is turning their inventory into sales. You can calculate the inventory turnover ratio by dividing the inventory days ratio by 365 and flipping the ratio. If the ending inventory figure is not a representative number, then use an average figure instead, such as the average of the beginning and ending inventory balances. The cost of goods sold is reported on the income statement. The second component is sales. By December almost the entire inventory is sold and the ending balance does not accurately reflect the company’s actual inventory during the year. Generally, inventory turnover is calculated with the formula Turnover = Cost of Goods Sold (COGS)/Average Inventory. Walmart. COGS can be obtained from the Income Statement and Average Inventory can be obtained from the Balance Sheet of the company. Donny’s Furniture Company sells industrial furniture for office buildings. By using Investopedia, you accept our, Investopedia requires writers to use primary sources to support their work. Banks want to know that this inventory will be easy to sell. Inventory Turnover Ratio is a key to efficient stock replenishment. Average inventory is used instead of ending inventory because many companies’ merchandise fluctuates greatly throughout the year. 1. U.S. Securities and Exchange Commission. Put simply, the ratio measures the number of times a company sold its total average inventory dollar amount during the year. In this example, inventory turnover ratio = 1 / (73/365) = 5. The inventory turnover ratio is a measure of how well a company generates sales from its inventory. Cost of Goods Sold: $452,700 Solution Use below given data for the calculation. This measurement also shows investors how liquid a company’s inventory is. In general, higher inventory turnover indicates better performance and lower turnover, inefficiency. Inventory turnover ratio formula The formula for inventory turnover ratio is quite similar to other turnover ratios. The inventory turnover ratio formula is equal to the cost of goods sold divided by total or average inventory to show how many times inventory is “turned” or sold during a period. Inventory typically includes finished goods, such as clothing in a department store. The formula/equation is given below: Two components of the formula of inventory turnover ratio are cost of goods sold and average inventory at cost. Find a balance between sales and stock by using these formulas and tips. Inventory turnover indicates the rate at which a company sells and replaces its stock of goods during a particular period. COGS is a measure of a company's production costs of goods and services. This formula is used to determine how quickly a company is converting their inventory … Inventory Turnover Formula and Calculation . It is calculated as the cost of goods sold divided by the average inventory. Inventory turnover is the number of times a company sells and replaces its stock of goods in a period. Sales have to match inventory purchases otherwise the inventory will not turn effectively. Company STYLISH Ltd. is operating in the clothing products and income statement of last year of the company shows the following figures. Inventory management is the process of ordering, storing and using a company's inventory: raw materials, components, and finished products. Many companies ’ merchandise fluctuates greatly throughout the year turnover provides reflects well... 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