Inventory turnover is the number of times a business sells and replaces its stock in a period. You calculate the inventory turnover ratio by dividing cost of goods sold by average inventory.
That's CFI's definition, and the turnover figures on this page come from CFI. A higher number generally means your goods sell faster. A lower one points to weak sales and stock piling up.
The inventory turnover ratio formula
Inventory turnover ratio = cost of goods sold / average inventory
Average inventory is the beginning and ending inventory balances for the period, added together and halved. CFI notes you can work it out monthly or quarterly as well as yearly, which is handy if your sales are seasonal. Cost of goods sold comes from your profit and loss, and I've explained what belongs in it in a separate guide to COGS.
There's a shortcut hiding here. Shopify's COGS formula is (beginning inventory + purchases) - ending inventory, so it uses the same two stock counts you need for average inventory. Count your stock at the start and end of the period, record your purchases, and you've got everything for both numbers.
How to calculate it in five steps
- Take cost of goods sold for the period.
- Add the beginning and ending inventory together and halve the total to get average inventory.
- Divide COGS by average inventory. That's your turnover ratio.
- Convert it to days if you'd like a figure that's easier to picture: inventory / COGS x 365.
- Compare the result with your own history and with businesses in your industry.
Turnover days: the same number as a count of days
CFI also turns the ratio into days, which is often easier to act on. The formula is inventory divided by cost of goods sold, times 365.
CFI's model example has 73 days of inventory. Converting back gives 1 / (73 / 365) = 5, so the company sells and replaces its stock five times a year. Put the other way round, its stock sits for about 73 days before it's sold.
Walmart vs Target: CFI's comparison
CFI compares two big retailers that sell similar things. I've added the days column by dividing 365 by each ratio:
| Retailer | Inventory turnover | Roughly how long stock sits |
|---|---|---|
| Walmart | 8.26 times a year | About 44 days |
| Target | 5.54 times a year | About 66 days |
In plain terms, Target holds each item about three weeks longer than Walmart before it sells. That's three extra weeks of storage, handling and cash tied up in stock.
CFI reads this as Walmart selling the stock it buys more efficiently, and likely carrying lower storage and holding costs as a result. It's a fair comparison because both are in the same industry, which is the point of the next section.
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High vs low turnover, and why industry matters
CFI says a high ratio is desirable because it cuts storage costs and other holding expenses. A low ratio may point to poor sales, excess stock or ineffective inventory management. Unsold stock also carries risk: CFI names exposure to market price swings and the risk of the goods becoming obsolete.
Here's the catch. CFI says you should only compare turnover between companies in the same industry, because benchmark ratios vary a lot from one industry to the next. A ratio of 5.54 could be strong in one sector and weak in another, so a figure from a business that sells something different tells you nothing. Your own history is the fairest yardstick. Turnover belongs on your list of ecommerce KPIs, next to your margins.
My take on inventory turnover
Slow stock is cash sitting on a shelf. Work the number out monthly, compare it with the same month last year rather than with a business in a different industry, and when it drops, find out which products are dragging it down. If you're still counting stock by hand, my roundup of the best inventory management software for small businesses is a good place to start.
Frequently asked questions
What is the inventory turnover ratio formula?
CFI's formula is cost of goods sold divided by average inventory. Average inventory is the beginning and ending balances added together and halved.
What is a good inventory turnover ratio?
It depends on your industry. CFI says to compare only with companies in the same industry; a higher ratio generally means goods sell faster and holding costs are lower.
How do you convert inventory turnover into days?
CFI's formula is inventory divided by cost of goods sold, times 365. In its example, 73 days of inventory equals a ratio of 5, or five turns a year.
What does an inventory turnover of 5 mean?
In CFI's model, a ratio of 5 means the company sells and replaces its stock five times a year, which works out at 73 days of inventory.
What does a low inventory turnover mean?
CFI says it may point to poor sales, excess stock or ineffective inventory management, and unsold stock risks price swings and becoming obsolete.
