Variables
Description
What is this formula?
The Inventory Turnover Ratio measures how many times inventory is sold and replenished during a specific period.
A higher turnover generally indicates efficient inventory management, while a low turnover may indicate excess inventory or slow-moving products.
When to use it
Use this formula when:
- Evaluating inventory efficiency.
- Monitoring warehouse performance.
- Comparing inventory policies.
- Identifying slow-moving stock.
- Optimizing working capital.
Example
A company reports:
COGS = 1,200,000 USD/year
Average inventory:
AI = 200,000 USD
Formula:
ITR = COGS/AI
Substitution:
ITR = 1,200,000/200,000
ITR = 6
Result:
The inventory turns over 6 times per year.
Applications
- Inventory management
- Supply chain analysis
- Financial performance evaluation
- Warehouse optimization
- Working capital management
Note
Inventory Turnover Ratio is influenced by industry type, product characteristics, and accounting methods. Comparisons should generally be made against similar businesses operating in the same sector.