Stock Diamond - Technical Analysis Education

Inventory turnover

The inventory turnover ratio is a ratio between the cost of goods sold and the average inventory balance. To create a more meaningful ratio it is advised to create the ratio based on inventory type. Also this ratio represents an average of all inventories and does not reflect the turnover rate for individual items. The value of this ratio will significantly change based on the industry so only comparisons by like companies will have any meaning.

To calculate inventory turnover:

Inventory turnover = cost of goods sold / average inventory

Some computational side notes:

• This ratio can be influenced based on the inventory costing method used by the company. This will influence the comparison even to like type companies if the companies being compared are using different inventory costing methods.