Inventory Turnover

Calculation

Inventory turnover is calculated by dividing cost of goods sold (income statement) by average inventory (balance sheet).

Interpretation

Inventory turnover is a liquidity ratio which measures the number of times a company converts its average inventory in a reporting period into sales.

A high inventory turnover indicates that the company has limited funds tied up in inventory, which is generally desired. However, inventory turnover that is too high may indicate lost sales due to inventory shortages.