Inventory turnover ratio: decide whether purchasing is helping or tying up cash
Calculate inventory turnover from COGS and average inventory, then review the result by category with stockouts, aging, open purchase orders, and cash needs.
Bottom line
Inventory turnover is cost of goods sold divided by average inventory. Faster is not automatically better. A useful review separates healthy sell-through from stockouts and separates planned seasonal stock from obsolete items that absorb cash.
Is it right for you?
- Use COGS and average inventory for the same scope and period
- Segment the ratio by product category or location
- Review aged stock and stockouts beside turnover
- Add open purchase orders and supplier commitments before deciding
Keep the numerator and denominator aligned
A common formula divides period COGS by average inventory. Average inventory is often calculated from beginning and ending balances, though a business with volatile stock may need more frequent averages.
Do not compare a category inventory balance with companywide COGS. The ratio should use the same products, locations, currency, and reporting period.
Interpret two ratios that look equally good
| High turnover case | What it may mean | Evidence to review |
|---|---|---|
| Strong sell-through | Inventory converts to sales without service failures | Margin, fill rate, and reorder lead time |
| Inventory too lean | Stockouts or emergency buying push the ratio up | Lost sales, backorders, expedite fees |
| Low turnover case | Planned seasonal or safety stock | Forecast and required availability date |
| Low turnover case | Obsolete, damaged, or overbought items | SKU aging and disposal plan |
Make the next purchase part of the review
Add open POs, minimum commitments, reorder points, supplier lead times, and available cash. A ratio based only on recorded inventory omits stock already approved but not yet received.
The decision may be to reduce an order, negotiate smaller batches, extend terms, clear old stock, or accept a lower turnover to protect an important service level.
Frequently asked questions
What is a good turnover ratio? It depends on the product, margins, lead times, seasonality, and service promise. Compare with the business's own operating targets.
How is turnover related to DIO? Both use inventory and COGS, but one expresses turns and the other expresses an approximate number of days.
Can a high ratio signal a problem? Yes. It may reflect stockouts, missed sales, or expensive emergency replenishment.
Why should AP join the review? Supplier invoices, payment terms, freight, credits, and open commitments affect the cash cost of the inventory plan.
What does a turnover ratio of 1.5 mean? It means inventory turns over about 1.5 times a year, or roughly once every 243 days (365 divided by 1.5). That is slow for most retail and consumer categories and would usually prompt a review of aged stock, but it can be normal for a business with long manufacturing cycles or expensive, low-volume inventory. Compare the number against the business's own history and category before treating it as a problem.
If your team fits that profile instead, check Quick ratio.
Related reading on this: Trial balance.