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Inventory turnover ratio definition

Description

Inventory turnover ratio (stock turnover) shows the number of time the inventory is turned over in the period of time. Most often this ratio is calculated for the period of one year, but other periods are also possible. Data to calculate this ratio is collected from balance sheet and income statement.

This ratio is important for company’s owners as it shows how effective their assets are used in a form of inventory. While calculating this ratio COGS (cost of goods sold) is used mostly but sometimes net sales can be used instead. In order to get a more precise value of the ratio using average inventory is better instead of inventory at the end of the period.

Norms and limitations

High levels of inventory indicate that a stock is being well managed as low value may result an ineffective management of inventory.

Different industries may have different values of this ratio, so there are no general norms.

Formula

Cost of goods sold (COGS, Cost of sales) is the cost that goes directly into creating the products that a company sells.

Inventory is an important part of assets that consists of these three parts: raw materials, work-in-process goods and finished goods.