![]() Doing so tells us that the inventory is on hand for an average of 73 days. Then, to get an idea of how often inventory needs to be replaced, divide the ratio into the time period (usually 365 days). Using the formula for inventory ratio, divide the COGS by the average inventory. Take XYZ fictional company with $500,000 in COGS and $100,000 in average inventory. ![]() How To Calculate Inventory Turnover: ExampleĪn example will help show how the inventory ratio is calculated. But this is just one indicator among many that investors should use when considering a stock purchase. Tip: Companies that are moving a lot of product are generally thought to be in a better financial position than those not moving product. A company with weak sales may have difficulty moving inventory and may be left with overstock issues or dead stock that isn’t selling. A low or slow inventory ratio is a negative indicator that suggests weak sales or an inventory problem.A high turnover ratio suggests that the company has high sales and has products that are in demand and being purchased regularly. ![]() The inventory turnover ratio says a lot about a business's sales and whether it is doing a good job selecting and marketing products. Consider, for instance, a farm equipment seller that may carry much smaller inventory during the winter months. Important: Estimating average inventory using the midpoint of the beginning of year and end of year inventory may deliver a misleading result for companies whose sales have seasonal patterns. Many analysis just take the beginning of year inventory and end of year inventory found on the balance sheet, and judge the midpoint as the average. One method is to take inventory at the end of every month and then divide the sum by 12 to approximate an average.
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