---
title: "Inventory Turnover Ratio: Formula, Example and What Is Good"
description: "Inventory turnover ratio = COGS / average inventory. Worked example, days inventory outstanding, what a good ratio is by trade, and how to improve it."
canonical: https://luckpanda.app/blog/inventory-turnover-ratio
author: "Dhrumil Barot"
author_bio: "Dhrumil is a small-business operations and compliance expert. Dhrumil built LuckPanda so small businesses can run invoicing, inventory, accounts and compliance in one place."
published: 2026-10-28
updated: 2026-10-28
category: "Purchasing and inventory"
keywords: "inventory turnover ratio"
language: en
---

# Inventory Turnover Ratio: Formula, Example and What Is Good

Inventory turnover = COGS / average inventory. A rupee worked example, the sales-vs-COGS trap, seasonal averaging, days of stock, benchmarks and per-item analysis.

By [Dhrumil Barot](https://luckpanda.app/about#founder), Founder. Published 28 Oct 2026. Updated 28 Oct 2026. 5 min read.

**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**

| Input | Where to find it | Notes |
| --- | --- | --- |
| Cost of goods sold | Profit and loss statement ("cost of materials consumed" plus "purchases of stock-in-trade" plus change in inventories, in a Schedule III format) | Use the same period as the inventory figures |
| Opening inventory | Last year's balance sheet, "Inventories" | Valued at cost |
| Closing inventory | This year's balance sheet, "Inventories" | Valued at the lower of cost and net realisable value under IAS 2 / Ind AS 2 |

Both sides of the formula are at cost. [IAS 2 Inventories](https://www.ifrs.org/issued-standards/list-of-standards/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](https://luckpanda.app/blog/cogs-formula).

### Sales or COGS: which should you use?

Use COGS. Some older textbooks and some software divide sales by inventory instead. As [Investopedia notes](https://www.investopedia.com/terms/i/inventoryturnover.asp), 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:

| Item | Amount |
| --- | ---: |
| Revenue from operations | ₹1,60,00,000 |
| Cost of goods sold | ₹1,20,00,000 |
| Opening inventory (1 April 2025) | ₹18,00,000 |
| Closing inventory (31 March 2026) | ₹22,00,000 |

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:

| Month-end | Inventory | Month-end | Inventory |
| --- | --- | --- | --- |
| Apr | ₹20 lakh | Oct | ₹55 lakh |
| May | ₹24 lakh | Nov | ₹38 lakh |
| Jun | ₹28 lakh | Dec | ₹30 lakh |
| Jul | ₹34 lakh | Jan | ₹27 lakh |
| Aug | ₹42 lakh | Feb | ₹24 lakh |
| Sep | ₹50 lakh | Mar | ₹22 lakh |

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)

| Turnover per year | Days of stock | Turnover per year | Days of stock |
| ---: | ---: | ---: | ---: |
| 2 | 183 | 8 | 46 |
| 3 | 122 | 10 | 37 |
| 4 | 91 | 12 | 30 |
| 6 | 61 | 15 | 24 |

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](https://retalon.com/blog/inventory-turnover-ratio) show the spread:

| Retail category | Approximate turns per year | Days of stock |
| --- | --- | --- |
| Bakeries | 69.5 | 5 |
| Fruit and vegetable markets | 29.1 | 13 |
| Grocery stores | 15 | 24 |
| Pharmacies | 14.8 | 25 |
| Auto parts and tyres | 14 to 16 | 23 to 26 |
| Consumer electronics | 9 | 41 |
| Liquor stores | 6.1 | 60 |
| Cosmetics | 3.4 | 107 |
| Jewellery and accessories | 2 to 3 | 122 to 183 |
| Musical instruments | 2 | 183 |

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](https://luckpanda.app/blog/backorder-meaning) 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](https://luckpanda.app/blog/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:

| Item group | COGS | Average inventory | Turnover | Days |
| --- | ---: | ---: | ---: | ---: |
| Cotton dress material | ₹80,00,000 | ₹8,00,000 | 10.0 | 37 |
| Silk sarees | ₹30,00,000 | ₹7,00,000 | 4.3 | 85 |
| Embroidered lehengas | ₹10,00,000 | ₹5,00,000 | 2.0 | 183 |
| Total | ₹1,20,00,000 | ₹20,00,000 | 6.0 | 61 |

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](https://luckpanda.app/blog/reorder-point-formula) 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](https://luckpanda.app/blog/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](https://luckpanda.app/modules/inventory) posts stock movements from your invoices, bills and goods receipts, so item-level quantities line up with what you sold and bought.

## Questions

### How do you calculate the inventory turnover ratio?

Divide cost of goods sold for the period by average inventory for the same period. Average inventory is opening plus closing inventory divided by 2, or the average of month-end balances if stock is seasonal. ₹1.2 crore COGS ÷ ₹20 lakh average inventory = 6 times.

### What does an inventory turnover ratio of 4 mean?

A ratio of 4 means the business sold and replaced its average stock four times in the year, so stock sat for about 91 days (365 ÷ 4) before being sold.

### Is a higher inventory turnover ratio better?

Usually, because stock turns into cash faster and there is less risk of obsolescence. It is not better if it comes with frequent stockouts, lost sales or high freight from rush orders.

### What is the difference between inventory turnover and days inventory outstanding?

They carry the same information. Turnover counts how many times stock sold through in a period; days inventory outstanding expresses it as days: 365 ÷ turnover.

### Can the inventory turnover ratio be calculated monthly?

Yes. Use the month's COGS and the average of the opening and closing inventory for that month. Multiply a monthly ratio by 12 to compare it with an annual one, and expect it to swing with seasonal demand.

### Why is my inventory turnover ratio so low?

Common causes are slow or dead stock in a few item groups, buying in large lots to get a discount, long supplier lead times, or inventory on the books that is not physically there. Split the ratio by item group to see which one.

### What is a good inventory turnover ratio?

It depends on the trade. Grocery stores run about 15 turns a year and pharmacies about 14.8, while cosmetics sit near 3.4 and jewellery at 2 to 3. Compare against businesses selling the same goods and against your own ratio last year.

## More guides

- [Average Inventory: Formula, Examples and When Each Method Fits](https://luckpanda.app/blog/average-inventory)
- [Reorder Point Formula: How to Calculate It, With Safety Stock](https://luckpanda.app/blog/reorder-point-formula)
- [Purchase Price Variance (PPV): Formula, Examples and Journal Entries](https://luckpanda.app/blog/purchase-price-variance)

## Related tools

- [Gross margin calculator](https://luckpanda.app/tools/gross-margin-calculator): Gross profit and gross margin from revenue and cost of goods sold.

## About the author

**Written by [Dhrumil Barot](https://luckpanda.app/about#founder)**, Founder. Dhrumil is a small-business operations and compliance expert. Dhrumil built LuckPanda so small businesses can run invoicing, inventory, accounts and compliance in one place. [LinkedIn](https://www.linkedin.com/in/bdhrumil) · [X](https://x.com/fyidhrumil)