Inventory turnover ratio or stock turnover ratio indicates the relationship between COGS (Cost of Goods Sold) and Average Stock (Inventory). It indicates how efficiently the company investment in inventories is converted to sales.
Stock Turnover Ratio is an activity and efficiency ratio. This ratio helps to determine stock related issues such as overstocking and overvaluation.
Formula of Stock Turnover Ratio (Inventory Turnover Ratio)
Stock Turnover Ratio (Inventory Turnover Ratio) = COGS (Cost of Goods Sold)/Average Inventory
COGS (Cost of Goods Sold) = Opening Stock + Purchase – Closing Stock
Average Stock (Inventory) = (Opening Stock + Closing Stock)/2
Example of how to calculate Stock Turnover Ratio (Inventory Turnover Ratio)
Average Stock (Inventory) holding days
Average Stock holding days is the average number of days that a company holds its Stock (Inventory) before selling it. The days Stock (Inventory) outstanding calculation shows how quickly a company can turn inventory into cash.
Formula of Average Stock (Inventory) holding days
Average Stock (Inventory) Holding Days =365/Stock Turnover Ratio
Example of how to calculate average stock holding days
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