Formula
Inventory Turnover = Cost of Goods Sold / Average Inventory Value
How to Interpret
| Turnover Ratio | Meaning |
|---|---|
| 1-2 | Slow-moving inventory (monthly/bimonthly) |
| 3-6 | Moderate velocity (quarterly/bimonthly) |
| 6-12 | Fast-moving inventory (weekly/biweekly) |
| 12+ | Very fast turnover (multiple times per week) |
When to Use
- Compare turnover across product categories
- Benchmark against industry standards
- Identify slow-moving SKUs (low turnover)
- Assess if inventory is optimized or overstocked
Example
Scenario: Retail store
Annual COGS: $500,000
Average inventory: $100,000
Calculation:
Inventory Turnover = $500,000 / $100,000
Inventory Turnover = 5.0
Inventory is sold and replaced 5 times per year, roughly every 2.4 months (365 days / 5 ≈ 73 days).