Inventory turnover measures how many times a business sells or uses its average inventory during a period. It helps assess how efficiently inventory supports sales, but the result should be interpreted by category and business model.
How is inventory turnover calculated?
A common formula is cost of goods sold ÷ average inventory. If annual COGS is $1,200,000 and average inventory is $300,000, turnover is $1,200,000 ÷ $300,000 = 4 times.
Illustrative turnover calculation
| Calculation step | Amount | Result |
|---|---|---|
| Opening inventory | $280,000 | Period start |
| Closing inventory | $320,000 | Period end |
| Average inventory | $300,000 | ($280,000 + $320,000) ÷ 2 |
| Annual COGS | $1,200,000 | Cost of units sold |
| Inventory turnover | 4.0 | $1,200,000 ÷ $300,000 |
| Approximate days inventory | 91.25 days | 365 ÷ 4.0 |
A two-point average may be misleading when inventory is seasonal; use more frequent balances when available.
High vs. low turnover
Higher turnover can indicate efficient demand matching, but it can also signal insufficient stock and lost sales. Lower turnover may reflect excess, slow-moving or strategic inventory. Compare like products and periods.
What affects the metric?
Purchasing cycles, minimum order quantities, seasonality, lead time, product launches, write-downs and cost accounting all affect turnover. Revenue should not be substituted for COGS without stating a different formula.
How should it guide decisions?
Use turnover with service level, stockouts, gross margin, aged inventory and lead time. Reduce slow inventory without cutting stock required for reliable fulfillment.
