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Inventory Turnover Ratio

Understanding the Inventory Turnover Ratio: Measuring Inventory Efficiency

The Inventory Turnover Ratio is a financial metric that measures how often a company sells and replaces its inventory over a period. It indicates the efficiency of inventory management and how well a company converts its inventory into sales. A higher ratio suggests efficient inventory management and strong sales.


Inventory Turnover Ratio = Cost of Goods Sold (COGS)​ / Average Inventory


Suppose Company STU has the following financial details:


  • Cost of Goods Sold (COGS): $600,000

  • Beginning Inventory: $100,000

  • Ending Inventory: $150,000


To calculate the Inventory Turnover Ratio:


  1. Calculate the average inventory: (100,000+150,000)/2=125,000

  2. Divide COGS by average inventory: 600,000/125,000=4.8

An Inventory Turnover Ratio of 4.8 indicates that Company STU sells and replaces its inventory approximately 4.8 times a year. This suggests efficient inventory management.

Efficiency Ratio

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