Calculate your inventory turnover ratio, how many times you sell and replace your inventory over a period, from cost of goods sold and inventory levels.
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Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory, where Average Inventory is (Beginning Inventory + Ending Inventory) ÷ 2. It measures how many times you sold and replaced your entire inventory over the period.
For example, 500,000 in COGS with an average inventory of 50,000 gives a turnover ratio of 10, meaning inventory was fully sold and replaced 10 times over the period.
A higher turnover ratio generally indicates strong sales or efficient inventory management, while a low ratio can signal overstocking, weak sales, or obsolete inventory. What counts as 'good' varies significantly by industry, grocery retailers turn inventory far faster than furniture retailers, for example.
Using ending inventory alone instead of the average of beginning and ending inventory, which can distort the ratio if inventory levels swing significantly during the period.
Comparing turnover ratios across very different industries, grocery, fashion, and heavy equipment all have naturally different 'normal' turnover rates.
Chasing an artificially high turnover ratio by understocking, which can hurt sales through stockouts even though the ratio itself looks better.
Use COGS for the same period as your beginning and ending inventory figures, typically a full year for an annual turnover ratio, or a quarter if you're tracking more frequently.
Days to sell inventory is 365 divided by the turnover ratio. A turnover ratio of 10 means inventory sits for roughly 36.5 days on average before being sold.
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