In this video we discuss what is inventory turnover ratio and how to calculate inventory turnover ratio. We go through an example using turnover at cost, and explain what the turnover ratio actually means
Transcript/notes
The formula to calculate inventory turnover is turnover at cost equals, cost of goods sold divided by average inventory at cost. And inventory turnover is sometimes referred to as stock turnover or inventory turns.
If a business uses retail to value its inventory, rather than cost, the formula is the same, but retail sales is used and average inventory at retail is used.
As an example, if a business has an average inventory value at cost of $33,500 and the cost of goods sold was $389,250, what was inventory turnover at cost?
Using this formula, we have turnover at cost equals, $389,250 divided by $33,500, which calculates to 11.62 rounded off.
What this 11.62 means is that the inventory was turned over 11.62 times. So, if this inventory period was over a year, this business turned its inventory over 11.62 times that year.
We can take 365, the number of days in a year and divide by 11.62, which equals 31.41 rounded off. This means that this business turned over its inventory about every 31 days.
And the inventory ratio is, or can be used to compare similar businesses.
Chapters/Timestamps
0:00 Formula for inventory turnover ratio at cost and at retail
0:25 Example inventory turnover calculation
0:52 What does inventory turnover mean?
