Inventory Turnover
How often stock is sold and replaced, and how long a unit sits before selling.
Stock is sold and replaced 5 times per period, on average inventory of 180.
How long a unit sits in stock on average. The same information as turnover, expressed in a way that is easier to act on.
Faster is not automatically better. High turnover with frequent stockouts means lost sales, and the right level is set by the industry — a supermarket turns produce weekly while a jeweller may turn stock once or twice a year.
Inventory turnover is cost of goods sold divided by inventory. With 900 of COGS against average inventory of 180, stock turns over 5 times a year — meaning a unit sits for about 73 days before it sells.
Two views of the same fact
Turnover counts how many times a business sells through and replaces its entire stock in a period. Five turns a year means the shelves empty and refill five times. Days inventory outstanding restates this as a duration: 365 divided by 5 gives 73 days as the average time a unit waits to be sold.
The two are the same information, but days are usually easier to act on. Telling a buyer that stock turns 5.2 times invites a shrug; telling them a unit sits for ten and a half weeks tends to start a conversation.
Use COGS, not revenue
The single most common error here is dividing revenue by inventory. Inventory is carried on the balance sheet at cost, so the numerator must also be at cost — otherwise the margin gets baked into the ratio and turnover is systematically overstated. A firm with a 50% gross margin would appear to turn stock twice as fast as it really does.
Average inventory is (opening + closing) ÷ 2, which smooths seasonal swings. Use 365 days for a year or 90 for a quarter.
Worked example: COGS of 900
Average the two balances, divide, then convert to days:
- 1 Take cost of goods sold. 900 for the year — the cost of the stock actually sold, not the revenue it generated.
- 2 Average the inventory. Opening 160 and closing 200 give (160 + 200) ÷ 2 = 180.
- 3 Divide. 900 ÷ 180 = 5.0 turns per year.
- 4 Convert to days. 365 ÷ 5.0 = 73 days. A unit arriving today would typically sell in about ten weeks.
- 5 Compare, do not judge in isolation. Five turns is excellent for furniture and alarming for fresh produce. The benchmark is the industry, and the firm’s own history.
Turnover and days inventory
The same relationship read both ways, on a 365-day year. Higher turnover always means fewer days.
| Turnover | Days inventory | Typical of |
|---|---|---|
| 52× | 7 days | Fresh food, daily replenishment |
| 12× | 30 days | Fast-moving consumer goods |
| 8× | 46 days | General retail |
| 5× | 73 days | Apparel, mixed retail |
| 3× | 122 days | Furniture, appliances |
| 1× | 365 days | Jewellery, heavy machinery |
Faster is not automatically better
It is tempting to read high turnover as pure efficiency, and up to a point it is — capital is not tied up, obsolescence risk is low, and warehousing costs less. But turnover that is too high often means the business is running out of stock, and a stockout costs a sale outright and sometimes the customer with it.
The interesting cases are where turnover moves. A ratio falling year on year suggests stock building up faster than it sells — a warning of overordering, weakening demand, or goods becoming obsolete. A ratio rising sharply might mean genuine improvement, or it might mean the firm is understocked and losing sales it never records.
Two mechanical cautions. Seasonal businesses need average inventory rather than a year-end figure, since many retailers deliberately close their year when stock is at its lowest — a snapshot then flatters turnover considerably. And firms using LIFO in a period of rising prices report lower inventory values than those using FIFO, which inflates their apparent turnover for reasons that have nothing to do with operations.