Expert in supply chain efficiency, working capital metrics, and inventory valuation strategies.
The **Inventory Turnover Ratio Calculator** measures how many times a company’s inventory is sold and replaced over a given period. It is a critical efficiency metric for retail and manufacturing businesses. Enter values for any three variables (Cost of Goods Sold, Average Inventory, Turnover Ratio, or Days Inventory Outstanding) to solve for the missing one.
Inventory Turnover Ratio Calculator
Instructions: Enter values for any three of the four core parameters to solve for the missing one.
Inventory Metrics
Inventory Turnover Formulas
The calculation is based on the relationship between COGS and Average Inventory, and the resulting Days Inventory Outstanding:
Inventory Turnover Ratio ($ITR$):
$$ITR = \frac{COGS}{AI}$$Days Inventory Outstanding ($DIO$):
$$DIO = \frac{365}{ITR}$$ Formula Source: InvestopediaVariables Explained (Q, F, P, V – Parameters)
- $COGS$ (Cost of Goods Sold, $Q$): Total cost of products sold during the period.
- $AI$ (Average Inventory, $F$): Average value of inventory held over the period (e.g., (BI + EI) / 2).
- $ITR$ (Inventory Turnover Ratio, $P$): The number of times inventory is sold/replaced.
- $DIO$ (Days Inventory Outstanding, $V$): The average number of days it takes to sell inventory.
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What is Inventory Turnover Ratio?
The **Inventory Turnover Ratio (ITR)** is a crucial efficiency metric used in corporate finance and operations. It measures how effectively a company is managing its inventory by indicating how quickly it can convert its stock into sales. A higher ITR generally suggests efficient sales and inventory management, while a low ITR can signal overstocking, slow sales, or obsolete inventory, potentially tying up capital unnecessarily.
While a high turnover is often desirable, it must be considered within the context of the industry. For instance, a supermarket will have a very high ITR (fast turnover of perishable goods), whereas a high-end luxury jeweler will naturally have a much lower ITR.
How to Calculate Inventory Turnover (Example)
Assume a company has Cost of Goods Sold ($COGS$) of \$500,000 and Average Inventory ($AI$) of \$50,000. We solve for ITR and DIO:
- Step 1: Calculate Inventory Turnover Ratio
$$ITR = COGS / AI = \$500,000 / \$50,000 = \mathbf{10.0}$$
- Step 2: Calculate Days Inventory Outstanding
$$DIO = 365 / ITR = 365 / 10.0 = \mathbf{36.5 \text{ days}}$$
This means the company sells and replaces its entire inventory **10 times** a year, or once every $\mathbf{36.5 \text{ days}}$.
Frequently Asked Questions (FAQ)
COGS is preferred because Average Inventory is valued at cost (what the company paid), while Revenue is at sales price. Using COGS ensures the ratio is calculated using comparable values (cost vs. cost), providing a true measure of efficiency.
Average Inventory is typically calculated as the sum of Beginning Inventory and Ending Inventory for a period, divided by two: $AI = (BI + EI) / 2$. This approach smooths out any potential anomalies or seasonality in inventory levels.
A high DIO (Days Inventory Outstanding) means the company is taking a long time to sell its inventory. This can be a sign of poor sales, weak demand, or obsolete stock, leading to higher storage costs and potential asset write-downs.
A higher ITR generally means higher liquidity, less risk of obsolescence, lower holding and storage costs, and better overall operational efficiency and capital usage.