Inventory Turnover Ratio: Formula, Examples & How to Improve It

Inventory turnover measures how many times a business sells and replaces its average inventory during a period. The standard formula is:

Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory

If annual COGS is $600,000 and average inventory is $100,000, inventory turnover is 6 times per year.

What inventory turnover tells you

Turnover helps show how efficiently inventory is moving through the business. A higher ratio usually means stock is moving faster, while a lower ratio can indicate slow-moving products, excess inventory, or weak demand. But context matters: a grocery business, gift shop, and furniture retailer will naturally have different turnover patterns.

How to calculate average inventory

A simple formula is:

Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2

If inventory value started at $80,000 and ended at $120,000, average inventory is $100,000.

Inventory turnover example

• COGS: $480,000
• Beginning inventory: $70,000
• Ending inventory: $90,000

Average inventory = ($70,000 + $90,000) ÷ 2 = $80,000.

Turnover = $480,000 ÷ $80,000 = 6.

That means the business sold through the equivalent of its average inventory about six times during the year.

Inventory turnover vs. sales

Use COGS rather than revenue in the standard formula because inventory on the balance sheet is carried at cost. Mixing sales revenue with inventory cost can distort the comparison.

What is a good inventory turnover ratio?

There is no universal good ratio. The useful comparison is against your own history, similar products, and the economics of your industry. A very high ratio can be positive, but it can also signal that inventory levels are too lean and stockouts are becoming more likely.

Why inventory turnover may be low

• Over-ordering
• Weak or declining demand
• Poor product mix
• Seasonal inventory left after peak demand
• High safety stock that is no longer justified
• Slow-moving or obsolete SKUs
• Poor replenishment decisions

How to improve inventory turnover

Improve demand forecasting

Better inventory forecasting can reduce overbuying by aligning purchase quantities more closely with expected demand.

Review reorder points

Reorder points that are too high can create excess stock. Read the reorder point guide to connect replenishment timing with actual demand and lead time.

Segment products

Use ABC inventory analysis or another classification method to spend more attention on high-value and high-impact inventory instead of managing every SKU identically.

Reduce dead stock

Identify dead stock that is no longer contributing to sales and create a deliberate plan to discount, bundle, transfer, return, or discontinue it.

Buy in smaller, better-timed quantities

Large orders can lower unit cost but increase inventory carrying cost and working capital requirements. Purchasing should balance unit economics against how quickly inventory will actually sell.

Inventory turnover by location

Multi-location businesses should calculate turnover by store as well as across the company. A product can move quickly at one location and sit idle at another. Store-level visibility can reveal transfer opportunities before buying more stock.

Inventory turnover and days sales of inventory

Turnover and days sales of inventory (DSI) describe the same underlying movement from different angles. A common relationship is:

DSI = 365 ÷ Inventory Turnover

A turnover ratio of 6 corresponds to roughly 61 days of inventory.

How Stash fits

Stash helps physical businesses track stock, purchasing, suppliers, forecasting, and multi-location inventory in one system. Better visibility into what is selling, what is sitting, and what is already on order can support stronger inventory-turnover decisions.

Frequently asked questions

Is higher inventory turnover always better?

No. Extremely high turnover can mean inventory is too lean and the business is losing sales to stockouts.

Can I calculate turnover by product?

Yes. SKU- or category-level turnover can be more actionable than one company-wide ratio.

Should I use revenue or COGS?

The standard formula uses cost of goods sold because average inventory is valued at cost.