Days inventory turnover formula how to#

If using the average inventory balance, both the beginning and end of period balance sheets are necessary. The formula to calculate the stock turnover ratio is as follows.Īverage Inventory = (Beginning Inventory + Ending Inventory) ÷ 2 in a year-over-year analysis)- as well as to that of its industry peer group - which are both practical methods to derive insights into the management team’s inventory management decisions and future business trajectory.

The stock turnover ratio of a company can be compared relative to historical trends (i.e. Step 2: Divide Cost of Goods Sold (COGS) by Average Inventory.Step 1: Calculate Average Inventory (Beginning and End of Period Balance).

The steps for calculating the ratio are as follows: Since the stock turnover ratio counts the number of times that a company needed to replenish its inventory, a higher ratio implies that the company is converting inventory purchases into revenue more efficiently (and vice versa for a lower turnover ratio). The term “stock” refers to the inventory owned by a company and is recorded as a current asset on the balance sheet, as the company expects to cycle through this inventory within the next twelve months. The stock turnover ratio is a method to measure a company’s operating efficiency at converting its inventory purchases into customer sales.

Days inventory turnover formula how to#

How to Calculate Stock Turnover Ratio (Step-by-Step) The Stock Turnover Ratio determines the frequency at which a company must replace its inventory on hand over a given time horizon.