Inventory Turnover Ratio:
Cost of Goods Sold
The Inventory Ratio is the number of times that a business turns inventory during the year.In this example, the inventory turns 4.8 times.
To determine how many days of inventory you have on hand at any given time, divide the number computed into the number of days in the accounting period. For example, since the financial statement we are analyzing is for one year, we took 360 divided by 4.8 and it indicates approximately seventy-five days of inventory on hand.
When a company becomes more complex, and you choose to calculate profit and loss by type of sales, this ratio can become a more valuable tool in determining under-stocking, over-stocking, and obsolescence of inventory by product.
Many companies try to strive for the most turnovers within an operating cycle. Be cautious with this approach. To increase your inventory turnover, you must reduce the amount of inventory on hand, in relation to the cost of goods sold.Â This may result in lower sales if you have an insufficient amount of inventory available for sale to customers.
Source: Harvey A. Goldstein, CPA , Granville Publications