Inventory Turnover Ratio Measurement Methods

Inventory Turnover Ratio Measurement Methods

The inventory turnover ratio is a financial metric used to measure the efficiency of a company’s management in controlling its inventory levels. It indicates how quickly a company sells and replaces its inventory within a specific period. A high turnover ratio generally suggests effective sales strategies, while a low turnover ratio may indicate poor sales performance or excessive stock levels.

Methods to Calculate Inventory Turnover Ratio:

  1. Basic Formula:
  2. The most common method for calculating the inventory turnover ratio is by using the basic formula:

                Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

    • This method provides an overall picture of how efficiently a company manages its inventories.
    • A higher ratio implies faster selling and replenishing cycles, indicating better cash flow and reduced carrying costs.
    • A lower ratio may suggest slow-moving or obsolete products that require attention.