Inventory to sales ratio = Average Inventory / Net Sales Where, Average Inventory = (average of start + end inventory)/2 And Net Sales = gross sales - returns. Inventory to sales ratio determines the relation between its inventory and sales while giving you an idea of how your company's inventory is performing. The smaller the figure of the ratio the better is your company doing because that indicates that your net sales are high while your inventory is low. However, there is one catch in that, there are chances that your inventory to sales ratio is low because your sales are low and because of that you are keeping low inventory as well. So, don't entirely rely on inventory to sales ratio and keep an eye on inventory levels and sales individually as well.