Inventory Turnover Ratio: Formula, Example and What Is Good

TL;DR: The inventory turnover ratio is cost of goods sold divided by average inventory, and it tells you how many times you sold through your stock in a period. A ratio of 6 for a year means stock sat for about 61 days on average (365 ÷ 6). What counts as good depends on what you sell: grocery stores turn about 15 times a year, jewellery 2 to 3 times.

The inventory turnover ratio is a measure of how many times a business sells and replaces its inventory during a period, usually a financial year. The formula is inventory turnover = cost of goods sold ÷ average inventory. A trader with ₹1.2 crore of cost of goods sold and average inventory of ₹20 lakh has a turnover of 6. Higher usually means stock converts to cash faster; too high can mean you are running out of stock and losing sales.

What is the inventory turnover ratio formula?

The inventory turnover ratio formula is:

Inventory turnover = cost of goods sold (COGS) ÷ average inventory

Average inventory = (opening inventory + closing inventory) ÷ 2

Both sides of the formula are at cost. IAS 2 Inventories (adopted in India as Ind AS 2) requires inventories to be measured at the lower of cost and net realisable value, so the balance sheet inventory figure is a cost figure. That is why COGS, not sales, belongs on top. If you need COGS from scratch, see the COGS formula guide.

Sales or COGS: which should you use?

Use COGS. Some older textbooks and some software divide sales by inventory instead. As Investopedia notes, sales include your markup while inventory is at cost, so the sales version inflates the ratio. The bigger your margin, the bigger the distortion, and comparisons between a 15% margin distributor and a 60% margin brand become meaningless.

How do you calculate inventory turnover? A worked example

A Surat textile trader has these figures for the year ending 31 March 2026:

1. Average inventory = (₹18,00,000 + ₹22,00,000) ÷ 2 = ₹20,00,000
2. Inventory turnover = ₹1,20,00,000 ÷ ₹20,00,000 = 6.0 times
3. Days inventory outstanding = 365 ÷ 6.0 = 61 days

Using sales instead would give ₹1,60,00,000 ÷ ₹20,00,000 = 8.0, 33% higher than the real figure for the same stock, because the trader's 25% gross margin sits in the numerator.

Why can two-point averaging be wrong?

The opening-plus-closing average only works when stock levels are roughly flat through the year. Many Indian businesses close their books on 31 March, after the festive season stock has sold through, so both year-end figures are low. Suppose the same trader carried this much stock at each month-end:

The 13-point average (opening ₹18 lakh plus the twelve month-ends) is ₹4,12,00,000 ÷ 13 = about ₹31.7 lakh. Turnover is then ₹1,20,00,000 ÷ ₹31,70,000 = 3.8 times, or 96 days of stock, not 61. If your stock is seasonal, average the month-end balances. Lenders reviewing your stock statements for a cash credit limit will see the monthly figures, so you should too.

How do you convert turnover into days?

Days inventory outstanding (DIO), also called days sales of inventory, is the average number of days stock sits before it is sold. It is the same information as turnover, expressed in days:

DIO = 365 ÷ inventory turnover (or average inventory ÷ COGS × 365)

For a quarter, use COGS for the quarter and 91 days; for a month, monthly COGS and 30 days. Do not compare a quarterly ratio with an annual one: a quarterly turnover of 1.5 is roughly an annual turnover of 6.

What is a good turnover for your trade?

A good turnover is one at or above peers selling similar goods, and rising year on year. No single figure fits every trade: a bakery whose bread spoils in 2 days must sell through stock every few days, while a jeweller can hold a necklace for 180 days without loss. Retalon's retail benchmarks show the spread:

These are broad retail averages from a retail analytics vendor, not audited industry data; use them for direction, not as a target. The better benchmark is the annual reports of two or three listed companies in your segment: divide their COGS by the average of their opening and closing inventories, exactly as above.

When is a high turnover bad?

A high turnover is bad when it comes from carrying too little stock. If your turnover rises while your stockout count, backorders or rush purchase freight also rise, you are trading lost sales for a better ratio. Check the ratio alongside fill rate. Buying in very small lots to keep turnover high also raises ordering cost; the EOQ formula shows where that trade-off balances.

Why calculate turnover per item, not just for the business?

The business-wide ratio hides which items are the problem. The trader's 6.0 overall might be:

Lehengas are a quarter of the stock but a twelfth of the cost of sales. Freeing half of that ₹5 lakh is worth more than squeezing the cotton line. Within a group, items with zero sales in 180 days (or more than 50% of their stock older than 90 days) are candidates for clearance before they become an IAS 2 write-down to net realisable value, which hits profit in the year it happens.

How do you improve inventory turnover?

Improve turnover by reducing the stock you hold for the same sales, or selling more from the same stock:

1. Order smaller, more often for fast movers: moving from one order every 60 days to one every 30 days halves cycle stock, within the supplier's minimum order quantity. Set a reorder point per item instead of buying by feel.
2. Shorten supplier lead time. Every day of lead time is a day of stock you must carry as cycle and safety stock.
3. Clear slow stock deliberately: bundle it with fast movers, discount it before the season ends, or return it to the supplier if your agreement allows.
4. Stop buying for the shelf picture. Depth of range in slow sizes and colours is the usual cause of low turns in apparel and footwear.
5. Count regularly. Phantom stock (units on the books that are not on the shelf) inflates average inventory and drags the ratio down. Cycle counting catches it without closing the store.

Related ratios

• Inventory to sales ratio = inventory ÷ net sales for the same period. It is roughly the inverse of turnover, on a sales basis; the US Census Bureau publishes it monthly for retail and wholesale. A ratio of 0.25 means stock equals 25% of one period's sales, roughly 7 to 8 days of a monthly figure.
• GMROI (gross margin return on inventory investment) = gross margin ÷ average inventory at cost. For the trader: (₹1,60,00,000 − ₹1,20,00,000) ÷ ₹20,00,000 = 2.0, so every rupee of stock earned ₹2 of gross margin in the year. It rewards high-margin slow items that turnover alone punishes.
• Stock turn at retail = sales ÷ average inventory at selling price. Used by retailers who keep stock at retail value; it is consistent because both sides include margin.

Tracking turnover per item needs stock and cost of sales from the same records. The LuckPanda Inventory module posts stock movements from your invoices, bills and goods receipts, so item-level quantities line up with what you sold and bought.