#STOCK TURNOVER FORMULA HOW TO#

The implication of inventory turnover rateĪ higher turnover ratio is typically a good sign for a company. The result shows how many times the company has sold and replaced its product inventory over the specified period. After determining both values, you can use the formula to find a company's ratio. The formula for calculating a company's inventory turnover ratio is the cost of goods sold divided by the average inventory. Apply the inventory turnover ratio formula (Starting inventory + ending inventory) / 2 = average inventoryįor example, if a company had a starting inventory of $10,000 and an ending inventory of $4,000, here's how you can calculate its average inventory: You can calculate the average inventory by adding its starting inventory to its ending inventory and dividing the results by two, as shown in this formula: It refers to the average amount of inventory a company had over a specific period.

The company's average inventory value is another requirement for finding the inventory turnover ratio. To calculate COGS, you may add the starting inventory for a specific period to any additional expenses while subtracting the ending inventory from the sum, represented in this formula:ĬOGS = starting inventory + additional expenses - ending inventoryįor example, if a company has a starting inventory of $10,000, $2,000 of additional inventory expenses, and an ending inventory of $4,000, you can use the formula to calculate its cost of goods sold:

Usually, the COGS comprises the cost of materials, labour, and other utility or miscellaneous expenses. A company's COGS refers to the direct cost of products it intends to sell over a specified period, including raw materials for making more products. The cost of goods sold (COGS) is a requirement for calculating a company's inventory turnover ratio. In contrast, smaller companies with fast-moving goods may calculate the inventory turnover ratio quarterly or monthly. For example, large companies may prefer to calculate annually to view their inventory turnover comprehensively. You can use whichever length of time is most relevant to the company's operation schedule, ensuring the relevant details for that period are available in the company records. To calculate a company's inventory turnover ratio, you may first select a period over which you intend to calculate.

#STOCK TURNOVER FORMULA HOW TO#

Here's an overview of how to calculate the inventory turnover ratio: 1. How to calculate the inventory turnover ratio To calculate the ratio accurately, it's important for the company to manage its stock efficiently so it can monitor the number of products in its inventory. A higher turnover ratio can show the company has a high sales volume, while a low inventory turnover ratio shows the company may take a relatively long time to sell all its products. Companies also use this ratio to determine how fast they can sell products that are currently in inventory. What is the inventory turnover ratio?Ī company's inventory turnover ratio refers to the rate at which it may sell and replenish its inventory within a specific period. In this article, we explain what the ratio involves, explore steps for how to calculate the inventory turnover ratio, address its implications, discuss how companies can manage inventory turnover, and provide examples to help you with your own calculations. Understanding how to calculate the inventory turnover ratio can help you gain valuable insights into the operations of a business. One of the most popular metrics for evaluating performance is the company's inventory turnover ratio. It's vital for companies to monitor various aspects of their processes to evaluate their performance accurately.

Stock turnover formula