A business can hold plenty of stock value and still be in trouble if that stock barely moves. Inventory turnover ratio cuts through the raw dollar figure. It asks a more useful question: how fast is this stock really being sold and replaced?

How to Calculate Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory

You get average inventory by taking (beginning inventory + ending inventory) ÷ 2, for the period — usually a year.

A Worked Example

Say a business has a yearly cost of goods sold of $600,000. Its average inventory value is $100,000. Its turnover ratio is 600,000 ÷ 100,000 = 6. That means the business sold through and replaced its stock about six times that year.

What a High or Low Ratio Means

A high ratio often means strong sales and smart stock management. But a very high ratio can also mean stock levels are too lean, which risks running out. A low ratio often means too much stock, weak sales, or dead stock piling up. It can also be normal for firms that sell high-value, slow-moving items like heavy equipment.

What Counts as "Good"

There's no single good number. It varies widely by industry. A grocery store might turn its stock over dozens of times a year. A furniture retailer might turn it over just a few times. The best measure is a business's own past trend, or close industry peers — not some generic benchmark.

Key Takeaways

Inventory turnover ratio measures how well stock moves, by comparing cost of goods sold to average stock. Tracking it over time, and comparing it against industry norms, gives a clearer read than the number alone.

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