Inventory Turnover Ratio

Inventory turnover ratio is a financial metric that measures how many times a company’s inventory is sold and replaced over a given period. It indicates how efficiently a company manages its stock and converts inventory into sales.

What Is Inventory Turnover Ratio?

Inventory Turnover = Cost of Goods Sold / Average Inventory

Or alternatively:
Inventory Turnover = Revenue / Average Inventory

Using COGS in the numerator is more precise because inventory is valued at cost.

**Average Inventory** = (Opening Inventory + Closing Inventory) / 2

A high turnover ratio means inventory is moving quickly (efficient); a low ratio means stock is sitting longer (potential overstock or slow sales).

Days Inventory Outstanding (DIO)

DIO = 365 / Inventory Turnover

DIO converts the ratio into days, showing the average number of days inventory is held before being sold.

Industry Benchmarks

| Industry | Turnover (approx) | DIO |
|———|—————–|—–|
| Supermarkets/FMCG | 15-25x | 15-25 days |
| Automobiles | 5-10x | 36-73 days |
| Pharma | 4-8x | 45-90 days |
| Jewellery | 2-4x | 90-180 days |
| Aerospace | 1-2x | 180-365 days |

Why Inventory Turnover Matters

– High turnover reduces storage costs and obsolescence risk
– Low turnover may signal weak demand, product issues, or poor procurement planning
– Very high turnover could indicate stock-outs (not keeping enough inventory to meet demand)
– In working capital analysis, inventory is a key driver of cash cycle length

Practical Example

A consumer electronics company has COGS of Rs 1,200 crore and average inventory of Rs 200 crore. Inventory turnover = 1,200 / 200 = 6x. DIO = 365 / 6 = 61 days. This means the company sells and replaces its inventory approximately every 2 months.

Key Takeaways

– Inventory turnover = COGS / Average Inventory; measures how efficiently stock is converted to sales
– Higher turnover is generally better, indicating fast-moving goods and efficient procurement
– DIO (Days Inventory Outstanding) = 365 / Turnover; shows average holding period in days
– Compare turnover within the same industry; perishable goods companies have very high turnover, capital goods have low
– Declining inventory turnover may signal demand weakness or overstocking