Inventory turnover is the number of times inventory sells through and is replaced over a period, usually a year. It is calculated as cost of goods sold divided by average inventory value. It measures how hard your working capital is working, which makes it a finance metric rather than an operational one.
In more detail
Turnover and days of cover answer related questions from opposite ends. Days of cover looks forward at one product and asks how long it lasts. Turnover looks backward across the whole business and asks how efficiently capital cycled.
A high number is not automatically good. It can mean efficient buying, or it can mean you are chronically under-stocked and losing sales you never see. Turnover read without a stockout rate beside it is half a picture.
It is also only comparable within a category. A business selling perishables and one selling furniture have structurally different turnover and neither figure says anything about the other.
How it is calculated
Inventory turnover = cost of goods sold ÷ average inventory value at cost
Worked example
Your cost of goods sold for the year was 240,000. Average inventory at cost was 60,000. Turnover is 4, meaning stock cycled about four times.
Whether 4 is healthy depends entirely on what you sell and what you did last year. If turnover rose from 3 to 4 while your stockout rate held steady, buying improved. If it rose while stockouts doubled, you simply bought less than you could have sold.
The figures above are invented to make the arithmetic legible. They are not a benchmark and should not be cited as one.
Where people get it wrong
- Using retail value instead of cost on both sides of the formula, which inflates it.
- Reading a high number as unambiguously good without checking whether you were running out.
- Comparing across categories. The benchmark that matters is your own trend.
- Calculating it from a single month's closing stock, which is distorted by whenever your last delivery landed.
Common questions
What is the inventory turnover formula?
Cost of goods sold divided by average inventory value at cost, over the same period. Using retail value on either side inflates the result.
Is high inventory turnover good?
Not on its own. It can mean efficient buying or chronic under-stocking. Read it alongside your stockout rate, because the two together tell you which.
How is turnover different from days of cover?
Turnover looks backward across the whole business at capital efficiency. Days of cover looks forward at one product and asks how long current stock lasts. One informs finance, the other informs this week.