Inventory Turnover Ratio
Cost of goods sold divided by average inventory, showing how many times stock is sold and replaced in a year.
Formula
Inventory Turnover = Cost of Goods Sold / Average Inventory; Inventory Days = 365 / Inventory Turnover
Unit
ratio (x, times)
In depth
A higher turnover means less cash trapped in stock and less exposure to obsolescence, but pushed too far it produces stock-outs and lost sales. The ratio should use cost of goods sold rather than revenue in the numerator, since inventory is carried at cost; using revenue overstates turnover by the whole gross margin. Falling turnover is one of the earliest quantitative signals of weakening demand, usually visible before revenue growth slows. Comparisons are only meaningful within an industry, since a jeweller and a dairy have structurally different cycles.
Worked example
Cost of goods sold ₹600 crore against average inventory of ₹160 crore gives turnover of 3.75 times, or 365 / 3.75 = 97 inventory days. Using revenue of ₹1,000 crore instead would show 6.25 times and 58 days — a flattering figure computed the wrong way.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Inventory Turnover Ratio” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.