What is the formula for calculating inventory turnover?

The formula for calculating inventory turnover is determined by dividing the cost of goods sold (COGS) by the average inventory. This calculation measures how efficiently a company is managing its inventory by showing how many times inventory is sold and replaced during a specific period.

Using COGS in this formula is beneficial because it reflects the actual cost incurred by the business in acquiring the goods that have been sold, providing a more accurate picture of how inventory is utilized in generating sales. The average inventory, which is calculated by adding the beginning and ending inventory for a period and dividing by two, allows for accounting fluctuations and seasonality.

A higher inventory turnover ratio indicates effective inventory management and suggests that a company is selling its inventory quickly, which is often a good sign of operational efficiency. Conversely, a low ratio may indicate overstocking or declining sales.

This understanding of COGS and average inventory is key in financial analysis and helps stakeholders assess the company's operational health and performance regarding inventory management.