![]() The speed at which a company can sell inventory is an important measure of business performance. While it can reflect strong sales, it could also be a signal of insufficient inventory on hand which could lead to lost business. Generally, but not always, a high inventory turnover ratio indicates that a business manages its stock very well.A comparison to your industry can help you to determine if your turnover ratio is good or needs improvement. Similar to other financial ratios, the inventory turnover ratio is only one piece of information about a company’s ability to manage its inventory. $40,000 / $15,000 = 2.67 How To Interpret the Inventory Turnover Ratio Inventory turnover ratio = COGS / Average inventory Inventory Turnover Ratio Example: ABC CompanyĪs shown in the example above for ABC Company, you would calculate the inventory turnover ratio by dividing $40,000 (COGS amount) by $15,000 (average inventory) for a total of 2.67. The inventory turnover ratio is calculated as follows: The average inventory for ABC Company is calculated as follows: Let’s assume the balance sheet for ABC Company as of January 1 shows a beginning inventory of $10,000 and an ending inventory of $20,000 as of December 31. You can run a balance sheet report to get your inventory numbers. However, if your inventory does not fluctuate a lot, use the ending inventory instead. ![]() Note that because inventory fluctuates for many companies throughout the year, using the average inventory for the period-rather than editing inventory-to calculate your ratio tends to be more accurate. ![]() The formula to calculate average inventory is:Īverage inventory = (Beginning inventory + Ending inventory) / 2 The most common cost-flow assumptions are average cost, first-in, first-out (FIFO), last-in, first-out (LIFO), and specific identification. ![]() Determining the cost of beginning and ending inventory can be difficult to do by hand and requires a cost-flow assumption. ![]()
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