Inventory Turnover Ratio
Also known as stock turn · inventory turns · turnover ratio · stockturn · days of inventory · how many times stock turns
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Divide the year's cost of goods sold by the average value of stock on hand and you get how many times the stockroom emptied and refilled. Two point four million dollars of cost against three hundred thousand dollars of stock is eight turns. Flip it and it reads more usefully: 365/8 is about 46 days of inventory sitting there.
The mistake that ruins the comparison is using revenue instead of cost of goods sold on top. Revenue includes your margin, inventory is valued at cost, and the ratio comes out inflated by exactly your markup. A shop running 40% margin that reports turns on revenue is claiming about 1.67 times the truth, and the number stops being comparable to anyone else's.
Turnover is also where inventory policy shows up in the financial statements. Ordering in EOQ lots sets average inventory near half the lot size, so halving the order quantity roughly doubles the turns. That looks like an unambiguous win on the balance sheet, and it is not, because it also doubles the number of orders you pay to place. Turnover measures one side of a trade-off, never both.
- = Turnover ratio (turns/yr)
- = Cost of goods sold per year ($)
- = Average inventory value ($)
- Turnover ratio — Return on Investment (ROI), Declining-Balance Depreciation (Book Value)
- Cost of goods sold per year — Equivalent Annual Cost, Economic Order Quantity (Wilson EOQ)
- Average inventory value — Loan Payment (Amortized Loan or Mortgage), Total Interest Paid Over a Loan