Enter the cost of goods sold, beginning inventory, and ending inventory into the calculator. The calculator will evaluate and display the inventory turnover ratio.
Inventory Turnover Ratio Formula
The following formula is used to calculate an inventory turnover ratio.
I = COGS / [(BI + EI)/2]
- Where I is the inventory turnover ratio
- COGS is the cost of goods sold
- BI is the beginning inventory
- EI is the ending inventory
Inventory Turnover Ratio Definition
The inventory turnover ratio is a measure of how quickly a business can turn inventory into sales. The better the turnover ratio, the better the company is at converting on sales and moving inventory once it’s on the shelf.
What can inventory turnover ratio tell you?
An inventory turnover ratio by definition is a measure of the speed at which a company sells its inventory. This information can be used in several different ways. One of which is comparing it to other companies in an industry.
Another way a company can use an inventory turnover ratio is to understand if it’s stocking too little or too much product. If the ratio is higher then the company is likely stocking too little product. On the flip side, if the ratio is low the company probably has an excess stock and needs to reduce it.
What should the inventory ratio be?
The proper inventory ratio for a company depends on several factors such as the types of goods being sold, the current cash on hand for the company, and industry averages. For example, a store that sells perishable items such as food should keep the turnover ratio as high as possible.
Inventory Turnover Ratio Example
How to calculate an inventory turnover ratio?
- First, determine the COGS.
Calculate the total cost of goods sold. For this example, we will say the COGS is $200.00.
- Next, determine the beginning inventory.
Calculate the beginning inventory value. At the start of the period, the inventory value was found to be $100.00.
- Next, determine the ending inventory.
Calculate the ending inventory value. At the end of the period, the inventory value was found to be $50.00.
- Finally, calculate the ITR.
Calculate the inventory turnover ratio using the equation above. The inventory turnover ratio is found to be: $200.00/((100-50)/2) = 8.
An inventory turnover ratio is a measure of how quickly a business moves products from inventory to sales.