What is 'Inventory Turnover'
Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period of time. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. It is calculated as sales divided by average inventory.
BREAKING DOWN 'Inventory Turnover'
Inventory turnover measures how fast a company is selling inventory and is generally compared against industry averages. A low turnover implies weak sales and, therefore, excess inventory. A high ratio implies either strong sales and/or large discounts.
The speed with which a company can sell inventory is a critical measure of business performance. It is also one component of the calculation for return on assets (ROA); the other component is profitability. The return a company makes on its assets is a function of how fast it sells inventory at a profit. As such, high turnover means nothing unless the company is making a profit on each sale.
Inventory Turnover Example
Inventory turnover is calculated as sales divided by average inventory. Average inventory is calculated as: (beginning inventory + ending inventory)/2. Using average inventory accounts for any seasonality effects on the ratio. Inventory turnover is also calculated using the cost of goods sold (COGS), which is the total cost of inventory. Analysts divide COGS by average inventory instead of sales for greater accuracy in the calculation of inventory turnover. This is because sales include a markup over cost. Dividing sales by average inventory inflates inventory turnover.
Approach 1: Sales Divided By Average Inventory
As an example, assume company A has $1 million in sales. The COGS is only $250,000. The average inventory is $25,000. Using the first equation, the company has inventory turnover of $1 million divided by $25,000, or 40. Translate this into days by dividing 365 by inventory days. The answer is 9.125 days. This means under the first approach, inventory turns 40 times a year, and is on hand approximately nine days.
Approach 2: COGS Divided By Average Inventory
Using the second approach, inventory turnover is calculated as the cost of goods sold divided by average inventory, which in this example is $250,000 divided by $25,000, or 10. The number of inventory days is calculated by dividing 365 by 10, which is 36.5. Using the second approach, inventory turns over 10 times a year and is on hand for approximately 36 days.
The second approach gives a more accurate measure, as it does not include a markup. Only compare inventory turnover that uses the same approach for an applestoapples comparison.
For more details, check out "How do I calculate the inventory turnover ratio?"

Turnover
Turnover is an accounting term that calculates how quickly a ... 
Perpetual Inventory
A method of accounting for inventory that records the sale or ... 
Ending Inventory
Ending inventory is a common financial metric measuring the final ... 
Inventory Accounting
Inventory account is the body of accounting that deals with valuing ... 
Obsolete Inventory
Obsolete inventory is a term that refers to inventory that is ... 
Inventory WriteOff
An inventory writeoff is an accounting term for the formal recognition ...

Investing
Reading The Inventory Turnover
Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ... 
Investing
How to Calculate Average Inventory
Average inventory is the median value of an inventory at a specific time period. 
Investing
How to Analyze a Company's Inventory
Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory. 
Investing
AR & Inventory Turnover Is Key For These Sectors
Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ... 
Investing
Understanding Periodic vs. Perpetual Inventory
An overview of the two primary inventory accounting systems. 
Investing
Dynamic Current Ratio: What It Is And How To Use It
Learn why this ratio may be a good alternative to the current, cash and quick ratios. 
Investing
U.S. Crude Oil Inventories Up (XOM)
U.S. crude oil inventories are at “historically high levels” for this time of the year, according to the Energy and Information Administration. 
Investing
Why It Is Important to Follow Crude Oil Inventories
Discover what oil inventories are, how they are communicated and what important insights they provide into the state of the oil market. 
Investing
Tesla's 3 Key Financial Ratios (TSLA)
Learn about Tesla Motors, Inc. and the company's key financial ratios, such as gross margin, operating margin and inventory turnover ratio.

Which industries tend to have the most inventory turnover?
Understand what inventory turnover measures and why it is good to have high inventory turnover. Learn what industries tend ... Read Answer >> 
What is the formula for calculating the inventory turnover ratio in Excel?
Find out more about inventory turnover ratio and the formula for calculating a company's inventory turnover ratio using Microsoft ... Read Answer >> 
What do efficiency ratios measure?
Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >> 
How can an investor determine the efficiency of a company's working capital management?
Learn how working capital is vital to a company’s survival. Also learn key metrics investors use to assess how efficiently ... Read Answer >> 
How is the economic order quantity model used in inventory management?
Understand what types of costs make up total inventory costs, and learn how the economic order quantity model is used to ... Read Answer >> 
What are some important financial ratios to evaluate with respect to consumer packaged ...
Understand various activity and solvency ratios, and learn why these ratios are important when evaluating the consumer packaged ... Read Answer >>