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This could indicate that the company is managing its inventory more efficiently than its competitors, resulting in lower holding costs and faster-moving products. To better understand the performance of Company B, we should compare this result to the industry average.Īssuming the industry average is 3.5, Company B’s inventory turnover is slightly higher than the industry benchmark. Inventory Turnover Ratio = $2,800,000 / $700,000 = 4 Analyzing the Results:Ĭompany B’s inventory turnover ratio of 4 indicates that it sells and replaces its entire inventory four times a year. Example 2: Calculating Inventory TurnoverĬompany B, a fashion retailer, has the following financial data for the year:Īverage Inventory = ($600,000 + $800,000) / 2 = $700,000 Company A should investigate these potential causes and implement strategies to improve its inventory turnover ratio. This could signal that the company has slower-moving items, overstocking issues, or other inefficiencies in its inventory management practices. To better understand the performance of Company A, we should compare this result to the industry average.Īssuming the industry average is 4, Company A’s inventory turnover is slightly lower than the industry benchmark. Inventory Turnover Ratio = $4,500,000 / $1,250,000 = 3.6 Analyzing the Results:Ĭompany A’s inventory turnover ratio of 3.6 indicates that it sells and replaces its entire inventory 3.6 times a year. Inventory Turnover Ratio = COGS / Average Inventory Now, we can calculate the inventory turnover ratio: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Example 1: Calculating Inventory TurnoverĬompany A, an electronics retailer, has the following financial data for the year:įirst, we need to calculate the average inventory:Īverage Inventory = (Beginning Inventory + Ending Inventory) / 2Īverage Inventory = ($1,000,000 + $1,500,000) / 2 = $1,250,000 To calculate the inventory turnover ratio, you’ll need two essential pieces of information: the cost of goods sold (COGS) and the average inventory. It assists in benchmarking against industry standards and competitors.It aids in evaluating the overall financial health and performance of a business.It helps identify potential issues with product demand or supply chain management.It shows the effectiveness of a company’s inventory management practices.Importance of Inventory Turnover RatioĪ healthy inventory turnover ratio is essential for several reasons: It’s a useful indicator of inventory management efficiency, as it demonstrates how well a company is utilizing its stock to generate sales and profit. The inventory turnover ratio is a financial metric that measures how quickly a company sells and replaces its inventory over a specific period (usually a year). FAQs Inventory Turnover Ratio Definition.Strategies to Improve Inventory Turnover.Importance of Inventory Turnover Ratio. Go to the Compatibility tab in the window that comes up. For Mac owners, many of the familiar multitouch controls are enabled. 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