Inventory turnover.
In plain English
Inventory turnover divides cost of goods sold by average inventory, giving the number of times a company cycled through its stock during the period. A high number means product moves quickly and less cash sits on shelves, though pushed too far it can mean stockouts and lost sales. A low number points to slow-moving or obsolete goods and a rising risk of write-downs. The right level depends entirely on the business, since a grocer turns inventory many times a year and a jeweler far fewer. Dividing the days in the period by turnover converts the figure into days inventory outstanding.
01Why it matters
Inventory is cash you cannot spend, so turnover tells you how fast a business converts its shelves back into money it can actually use for payroll or rent.
02The math, step by step
Say cost of goods sold is 1,200,000 dollars and average inventory is 200,000 dollars. Turnover is 6 times a year (1,200,000 divided by 200,000). That works out to about 61 days of inventory on hand (365 divided by 6).
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Using revenue in the numerator inflates the ratio, because revenue includes the markup and inventory is carried at cost. The standard calculation uses cost of goods sold so both sides of the fraction are measured at cost. Mixing the two makes a company look faster than it is.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice