The inventory turnover ratio is a metric that shows how many days it takes to sell and replace your inventory. Higher ratios tend to suggest greater sales and lower storage and holding costs.
The inventory turnover ratio is the following:
Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory
Average inventory means the average beginning and ending inventory for the time period tested. The period used can be annual, quarterly, monthly, or any other desired range. Below are some example calculations.
Inventory Turnover Ratio for the Entire Year
Company A wants to calculate its inventory turnover for the 2022 calendar year. Company A’s relevant income statement and balance sheet figures are as follows:
Inventory Balance December 31, 2021: $15,000
Inventory Balance December 31, 2022: $25,000
COGS for 1/1/2022 to 12/31/2022: $170,000
Inventory Turnover = 170,000 / [(15,000 + 25,000) / 2]
Inventory Turnover Ratio = 8.5
Inventory Turnover Ratio for the 1st Quarter
Company B wants to calculate its inventory turnover for the 1st quarter of 2022. Company B’s relevant income statement and balance sheet figures are as follows:
Inventory Balance December 31, 2021: $85,000
Inventory Balance March 31, 2022: $35,000
COGS for 1/1/2022 to 3/31/2022: $270,000
Inventory Turnover = 270,000 / [(85,000 + 35,000) / 2]
Inventory Turnover Ratio = 4.5