## What is 'Inventory Turnover'

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a period. The company can then divide the days in the period 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.

Next Up

## BREAKING DOWN 'Inventory Turnover'

Inventory turnover measures how fast a company sells inventory and analysts compare it to industry averages. Low turnover implies weak sales and, excess inventory. A high ratio implies either strong sales or large discounts.

The speed with which a company can sell inventory is a critical measure of business performance. It is also one component in the calculation of return on assets — 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. High turnover means nothing unless the company is making a profit on each sale.

## Inventory Turnover Example

Companies calculate inventory turnover as sales divided by average inventory. One can calculate average inventory 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, which is the total cost of inventory. Analysts divide COGS by average inventory instead of sales for greater accuracy in the inventory turnover calculation 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 and \$250,000 in COGS. The average inventory is \$25,000. Using the first equation, the company has an inventory turnover of \$1 million divided by \$25,000 in average inventory, which equals 40 turns per year. Translate this into days by dividing 365 by inventory turns. 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, which equals 10. You can then calculate the number of inventory days 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 because it does not include markup. Only compare inventory turnover that uses the same approach for an apples-to-apples comparison.

For more details, check out "How do I calculate the inventory turnover ratio?"

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5. ### Obsolete Inventory

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The passage provides an explanation of the inventory turnover ratio, its importance, and how it is calculated. It also includes examples of how to calculate inventory turnover using two different approaches: sales divided by average inventory and cost of goods sold (COGS) divided by average inventory.

Content Structure:
- Definition and explanation of inventory turnover
- Importance of inventory turnover in business performance
- Two methods to calculate inventory turnover with examples
- Comparison of the two methods and their accuracy

Analysis:
no_question

the passage does not contain a specific mathematical question or provide an answer to one. it is an explanatory text that describes a financial concept and provides examples of calculations, but it does not ask the reader to solve a problem or provide a specific answer.
Given a text passage, determine:
    1. If it contains a mathematical question (including word problems or calculations)
    2. If an answer to that mathematical question is provided in the text

First, describe the content structure you found in 1-2 sentences.

Then provide your analysis in the following format:
TYPE: <one of the following values>
- NO_QUESTION
- SINGLE_QUESTION
- SINGLE_QUESTION_WITH_ANSWER
- MULTIPLE_QUESTIONS
- MULTIPLE_QUESTIONS_WITH_ANSWERS
system
## What is 'Inventory Turnover'

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a period. The company can then divide the days in the period 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.

Next Up

## BREAKING DOWN 'Inventory Turnover'

Inventory turnover measures how fast a company sells inventory and analysts compare it to industry averages. Low turnover implies weak sales and, excess inventory. A high ratio implies either strong sales or large discounts.

The speed with which a company can sell inventory is a critical measure of business performance. It is also one component in the calculation of return on assets — 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. High turnover means nothing unless the company is making a profit on each sale.

## Inventory Turnover Example

Companies calculate inventory turnover as sales divided by average inventory. One can calculate average inventory 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, which is the total cost of inventory. Analysts divide COGS by average inventory instead of sales for greater accuracy in the inventory turnover calculation 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 and \$250,000 in COGS. The average inventory is \$25,000. Using the first equation, the company has an inventory turnover of \$1 million divided by \$25,000 in average inventory, which equals 40 turns per year. Translate this into days by dividing 365 by inventory turns. 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, which equals 10. You can then calculate the number of inventory days 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 because it does not include markup. Only compare inventory turnover that uses the same approach for an apples-to-apples comparison.

For more details, check out "How do I calculate the inventory turnover ratio?"

RELATED TERMS
1. ### Turnover

Turnover is an accounting term that calculates how quickly a ...
2. ### Perpetual Inventory

Perpetual inventory is a method of accounting for inventory that ...
3. ### Ending Inventory

Ending inventory is a common financial metric measuring the final ...
4. ### Inventory Accounting

Inventory account is the body of accounting that deals with valuing ...
5. ### Obsolete Inventory

Obsolete inventory is a term that refers to inventory that is ...
6. ### Inventory Write-Off

An inventory write-off is an accounting term for the formal recognition ...
Related Articles
1. Investing

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 ...
2. Investing

### How to Calculate Average Inventory

Average inventory is the median value of an inventory at a specific time period.
3. 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.
4. 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 ...
5. Investing

### Understanding Periodic vs. Perpetual Inventory

An overview of the two primary inventory accounting systems.
6. 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.
7. 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.
8. 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.
9. 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.
RELATED FAQS
1. ### 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 >>
2. ### 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 >>
3. ### 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 >>
4. ### 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 >>
5. ### 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 >>
6. ### 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 >>
Hot Definitions

An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
2. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
3. ### Inflation

Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
4. ### Discount Rate

Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
5. ### Economies of Scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
6. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
user
The passage provides an explanation of the inventory turnover ratio, its importance, and how it is calculated. It also includes examples of how to calculate inventory turnover using two different approaches: sales divided by average inventory and cost of goods sold (COGS) divided by average inventory.

Content Structure:
- Definition and explanation of inventory turnover
- Importance of inventory turnover in business performance
- Two methods to calculate inventory turnover with examples
- Comparison of the two methods and their accuracy

Analysis:
TYPE: NO_QUESTION

The passage does not contain a specific mathematical question or provide an answer to one. It is an explanatory text that describes a financial concept and provides examples of calculations, but it does not ask the reader to solve a problem or provide a specific answer.