Inventory Turnover Calculator

The Inventory Turnover Ratio is a key financial metric used to measure how effectively a company is managing its inventory.

The Inventory Turnover Ratio shows how many times a company has sold and replaced its average inventory level during a specific period (usually one year).

In short, the Inventory Turnover Ratio tells management whether they are making money efficiently from their stock or if they are incurring unnecessary risk and cost by holding too much inventory for too long.

• 1. Measures Efficiency & Sales Health:

  • It shows how quickly inventory is moving (sold and replaced).

  • A high ratio usually means strong sales and effective inventory management, minimizing capital tied up in stock.

  • A low ratio often signals weak sales or overstocking, leading to increased risk.

• 2. Assesses Inventory Risk (Obsolescence):

  • It highlights the danger of holding stock too long, which increases the likelihood of inventory becoming obsolete, damaged, or spoiled (especially critical in fast-moving industries like tech or food).

• 3. Impacts Cash Flow and Costs:

  • Faster turnover improves cash flow because cash is recovered from sales more quickly.

  • Slower turnover increases carrying costs (storage, insurance, rent, utilities) because items sit longer in the warehouse.

• 4. Calculates Days Sales of Inventory (DSI):

  • It is used to calculate the Days Sales of Inventory (DSI), which is the average number of days it takes to sell off inventory. This gives a clearer, time-based view of how long cash is locked up in stock.