# Inventory Turnover Ratio: What It Is, How It Works, and Formula

> **Definition**
>
> The inventory turnover ratio shows how quickly a company sells its products and restocks them over a period of time.

## What Is the Inventory Turnover Ratio?

The inventory turnover ratio is a financial ratio showing how many times a company turns over its [inventory](https://www.investopedia.com/terms/i/inventory.asp) in a given period, typically a [fiscal year](https://www.investopedia.com/terms/f/fiscalyear.asp). Businesses can also use this figure to complete additional calculations to find the number of days it takes to sell their inventory.

This metric is a crucial component of inventory management and operational efficiency. High turnover ratios signal strong sales or efficient purchasing. Low turnover ratios may mean overstocking, weak demand, or production declines.

Among the [efficiency ratios](https://www.investopedia.com/ask/answers/040715/what-do-efficiency-ratios-measure.asp) businesses use, the inventory turnover ratio is one of the most important, as it indicates how effectively companies utilize their assets to generate revenue.

### Key Takeaways

*   Inventory turnover ratio measures how efficiently a company uses its inventory by dividing the cost of goods sold by the average inventory value during a set period.
*   Inventory turnover ratios are only useful for comparing similar companies, and are particularly important for retailers.
*   A relatively low inventory turnover ratio may be a sign of weak sales or excess inventory, while a higher ratio signals strong sales but may also indicate inadequate inventory stocking.
*   Accounting policies, rapid changes in costs, and seasonal factors may distort inventory turnover comparisons.

![Inventory Turnover](https://www.investopedia.com/thmb/6RF7dCzGeFco-4EARTEIyRr--K0=/1080x0/filters:no_upscale():max_bytes(150000):strip_icc()/inventoryturnover_sourcefile-88a3f52149264a3b99a4a6c21d216a0c.png)

*— Investopedia / NoNo Flores*

## Understanding the Inventory Turnover Ratio

As mentioned, the inventory turnover ratio measures the number of times a company's inventory is sold and replaced over a certain period. A higher inventory ratio is usually better, although there may also be downsides to a high turnover.

Analyzing an inventory turnover ratio in conjunction with industry benchmarks and historical trends can provide valuable insights into a company's operational efficiency and competitiveness. On its own, the turnover ratio may not mean much. However, tracking it over time or comparing it against a similar company's ratio can be very useful.

## Inventory Turnover Formula and Calculation

The inventory turnover ratio is calculated as follows:

$\begin{aligned} &\text{Inventory Turnover} = \frac{ \text{COGS} }{ \text{Average Value of Inventory} } \\ &\textbf{where:} \\ &\text{COGS} = \text{Cost of goods sold} \\ \end{aligned}$

[Cost of goods sold (COGS)](https://www.investopedia.com/terms/c/cogs.asp) is also known as cost of sales. Analysts use COGS instead of sales in the formula for inventory turnover because inventory is typically valued at cost, whereas the sales figure includes the company's [markup](https://www.investopedia.com/ask/answers/102714/whats-difference-between-profit-margin-and-markup.asp). Some companies may use sales instead of COGS in the calculation, which would tend to inflate the resulting ratio.

Additionally, the [average value of inventory](https://www.investopedia.com/terms/a/average-inventory.asp) is used to offset [seasonality](https://www.investopedia.com/terms/s/seasonality.asp) effects. It is calculated by adding the value of inventory at the end of a period to the value of inventory at the end of the prior period and dividing the sum by 2.

## What an Inventory Turnover Ratio Can Tell You

A low inventory turnover ratio might be a sign of weak sales or excessive inventory, also known as overstocking. It could indicate a problem with a retail chain's [merchandising](https://www.investopedia.com/terms/m/merchandising.asp) strategy or inadequate marketing. Simply put, a low inventory turnover ratio means the product is not flying off the shelves, for whatever reason.

A [high inventory turnover ratio](https://www.investopedia.com/ask/answers/051915/which-industries-tend-have-most-inventory-turnover.asp), on the other hand, suggests strong sales. Alternatively, it could be the result of insufficient inventory. As problems go, ensuring that a company has sufficient inventory to support strong sales is a better one to have than needing to scale down inventory because business is lagging.

The speed with which a company can turn over inventory is a critical measure of business performance. Retailers that turn inventory into sales faster tend to outperform comparable competitors.

The [fast fashion](https://www.investopedia.com/terms/f/fast-fashion.asp) industry is an example. Competitors such as H&M and Zara typically limit runs and replace depleted inventory quickly with new items. Slow-selling items equate to higher holding costs. There is also the [opportunity cost](https://www.investopedia.com/terms/o/opportunitycost.asp) of low inventory turnover; an item that takes a long time to sell delays the stocking of new merchandise that might prove more popular.

A decline in the inventory turnover ratio may signal diminished demand, leading businesses to reduce output.

> **Important**
>
> A low inventory turnover ratio can be an advantage during periods of inflation or supply chain disruptions, if it reflects an inventory increase ahead of supplier price hikes or higher demand. For example, retail inventories fell sharply in the first year of the COVID-19 pandemic, leaving the industry scrambling to meet demand during the ensuing recovery.

## Inventory Turnover and Dead Stock

Inventory turnover is an especially important piece of data for maximizing efficiency in the sale of perishable and other time-sensitive goods. Examples include groceries, fashion, autos, and periodicals. An overabundance of cashmere sweaters, for instance, may lead to unsold inventory and lost profits, especially as seasons change and retailers restock accordingly. Such unsold stock is known as [obsolete inventory](https://www.investopedia.com/terms/o/obsoleteinventory.asp), or dead stock.

The inventory turnover ratio can be one way of better understanding dead stock. In theory, if a company is not selling a lot of a particular product, the COGS of that good will be very low (since COGS is only recognized upon a sale). Therefore, products with a low turnover ratio should be evaluated periodically to see if the stock is obsolete.

## Related Inventory Ratios

The [inventory-to-saIes ratio](https://www.investopedia.com/ask/answers/042715/how-do-you-analyze-inventory-balance-sheet.asp) is the inverse of the inventory turnover ratio, with the additional distinction that it compares inventories with net sales rather than the cost of sales. A higher inventory-to-sales ratio suggests that the company may be holding excess inventory relative to its sales volume, meaning there may be inefficiencies in its inventory management. A lower inventory-to-sales ratio implies that the company has a leaner inventory position relative to its sales, which may reflect tighter control over inventory levels and/or more efficient allocation of resources.

Another ratio inverse to inventory turnover is [days sales of inventory (DSI)](https://www.investopedia.com/terms/d/days-sales-inventory-dsi.asp), which marks the average number of days it takes to turn inventory into sales. DSI is calculated as the average value of inventory divided by the cost of sales or COGS, and multiplied by 365. Companies tend to want to have a lower DSI, and they usually want that DSI to be sufficient to cover short-term cash needs.

## Limitations of Inventory Turnover Ratios

The inventory turnover ratio is a valuable metric for many companies. However, it also has limitations that need to be taken into account:

*   **Industry variability**: Different industries have varying norms and practices regarding inventory management, so there will be natural differences in their ideal turnover ratios. Comparing turnover ratios across industries without considering these differences can be misleading. For example, publicly [listed](https://www.investopedia.com/terms/l/listed.asp) U.S. auto dealers turned over their inventory every 58 days on average in 2023, compared with every 33 days for publicly listed food store chains.
*   **Seasonal fluctuations**: Some businesses experience significant seasonal variations in demand, which can affect their inventory turnover ratios. A high turnover ratio during peak seasons may skew the overall ratio, and companies may look worse even though they've adequately planned for the slower seasons.
*   **Cost variations**: The cost of goods sold, on which the inventory turnover ratio is partly based, can fluctuate due to changes in production costs, raw material prices, or [currency exchange rates](https://www.investopedia.com/terms/c/currency-exchange.asp). These fluctuations can distort the accuracy and comparability of turnover ratios over time.
*   **Overlooked carrying costs**: While a high turnover ratio is generally seen as positive, it may overlook the costs associated with maintaining low inventory levels. For example, a company may incur high fees related to stockouts, rush orders, and lost sales opportunities. Businesses should consider the balance between inventory turnover and the associated carrying costs to optimize profitability.
*   **Ignoring lead times**: The inventory turnover ratio does not account for [lead times](https://www.investopedia.com/terms/l/leadtime.asp) or the time it takes to replenish inventory. A high turnover ratio may indicate efficient sales, but if lead times are long, it could lead to stockouts and potential customer dissatisfaction if inventory is not replenished quickly enough.

## Example of an Inventory Turnover Calculation

For fiscal year 2022, Walmart Inc. ([WMT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt)) reported cost of sales of $429 billion and year-end inventory of $56.5 billion, up from $44.9 billion a year earlier. Walmart’s inventory turnover ratio for the year was:  

**2022: $429 billion ÷ \[($56.5 billion + $44.9 billion)/2\], or about 8.5**

Dividing the 365 days in the year by 8.5 shows that Walmart turned over its inventory about every 42 days on average.

Fast-forward to 2024, Walmart reported cost of sales of $490 billion for the fiscal year ending January 2024. It also reported ending inventory of $54.9 billion, up from $56.6 billion a year earlier. So its inventory turnover ratio for 2024 was:

**2024: $490 billion ÷ \[($54.9 billion + $56.6 billion)/2\], or about 8.8**

This signals that from 2022 to 2024, Walmart increased its inventory turnover ratio. Dividing the 365 days in the year by 8.8 shows that Walmart turned over its inventory about every 41 days on average.

In instances like this, management should further explore the cause. It may be due to more efficient processes, or it may be due to more demand for the products it offers. However, very generally speaking, the movement of this ratio from 2022 to 2024 in Walmart's case appears to be positive.

## What Is the Inventory Turnover Ratio?

The inventory turnover ratio is a financial metric that measures how many times a company's inventory is sold and replaced over a specific period, indicating its efficiency in managing inventory and generating sales from it.

## How Do You Calculate Inventory Turnover?

Inventory turnover is calculated by dividing a company's cost of sales, or cost of goods sold (COGS), by the average value of its inventory over two recent consecutive periods.

## What Is a Good Inventory Turnover?

What counts as a "good" inventory turnover ratio will depend on the [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) for a given industry. In general, industries stocking products that are relatively inexpensive will tend to have higher inventory turnover ratios than those selling [big-ticket items](https://www.investopedia.com/terms/b/big-ticket-item.asp). [Inventory and accounts receivable](https://www.investopedia.com/articles/personal-finance/081215/know-accounts-receivable-inventory-turnover.asp) turnover ratios are extremely important to [companies in the consumer packaged goods sector](https://www.investopedia.com/ask/answers/060515/what-are-some-important-financial-ratios-evaluate-respect-consumer-packaged-goods.asp).

## Is High Inventory Turnover Good or Bad?

Companies will almost always aspire to have a high inventory turnover. After all, high inventory turnover reduces the amount of capital that they have tied up in their inventory. It also helps increase profitability by increasing revenue relative to fixed costs such as store leases, as well as the cost of labor. In some cases, however, high inventory turnover can be a sign of inadequate inventory that is costing the company potential sales.

## How Can Inventory Turnover Be Improved?

Some retailers may employ open-to-buy purchase budgeting or [inventory management software](https://www.investopedia.com/best-inventory-management-software-5088863) to ensure that they're stocking enough to maximize sales without wasting capital or taking unnecessary risks. Companies with localized supply chains and short production [lead times](https://www.investopedia.com/terms/l/leadtime.asp) may also use a [pull-through production](https://www.investopedia.com/terms/p/pull-through-production.asp) system, which procures the production materials and starts manufacturing only after a customer orders the finished product.

## The Bottom Line

The inventory turnover ratio shows how efficiently businesses sell and replace their inventory. A balance ratio helps free up cash, reduce holding costs, and meet customer demand. Tracking inventory turnover over time and comparing it to industry benchmarks can reveal whether stronger sales, smarter purchasing, or potential problems like overstocking drive changes to efficiency. 

This key inventory management metric, considered alongside other metrics like days of sales inventory, gives management and investors a clearer picture of how well the company manages inventory and drives sales growth. 

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Beginners' Guide to Financial Statement](https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html)."
>     
> 2.  Nikkei Asia. "[Japan Electronic Parts Makers' Rising Stocks Stoke Production Cut Fears](https://asia.nikkei.com/Business/Electronics/Japan-electronic-parts-makers-rising-stocks-stoke-production-cut-fears)."
>     
> 3.  The White House. "[Why the Pandemic Has Disrupted Supply Chains](https://www.whitehouse.gov/cea/written-materials/2021/06/17/why-the-pandemic-has-disrupted-supply-chains/)."
>     
> 4.  Ready Ratios. "[Inventory Turnover (Days) — Breakdown by Industry](https://www.readyratios.com/sec/ratio/inventory-turnover/)."
>     
> 5.  Walmart. "[2022 Annual Report,](https://stock.walmart.com/_assets/_ce43125c287746b5bb9dd177aebe127f/walmart/db/950/9649/annual_report/WMT-FY2022-Annual-Report.pdf)" Pages 53 and 55 (Pages 55 and 57 of PDF).
>     
> 6.  Walmart. "[2024 Annual Report](https://s201.q4cdn.com/262069030/files/doc_financials/2024/ar/2024-annual-report-pdf-final-final.pdf)," Pages 54 and 56 (Pages 56 and 58 of PDF).