Inventory turnover: definition, rate and calculation
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Are your highest margin products also the most profitable per euro of stock?
Schedule a meetingDiscover AI-Powered Sales ForecastingInventory turnover measures how many times inventory is replenished over a period: turnover rate = cost of sales ÷ average inventory at cost. A rate of 8 over one year means that the inventory is sold and replenished eight times, resulting in a turnover period of approximately 46 days. Combined with the profit margin, it shows the actual return on investment for each euro tied up in inventory.
The Essentials in 6 Questions
The number of times the stock is renewed over a period.
Purchasing, category managers , management control, pricing.
Tracked monthly , analyzed by season and by category.
By reference , department, store and warehouse.
Measure tied-up cash and inventory profitability.
Cost of sales ÷ average inventory at cost.
Inventory Turnover Formulas
Four formulas, always with amounts at the purchase cost so as not to mix up the bases.
| Indicator | Formula |
|---|---|
| Inventory turnover rate | Cost of sales for the period ÷ average inventory at cost |
| Average stock | (Beginning stock + ending stock) ÷ 2, or average monthly stock |
| Rotation time (in days) | Average inventory ÷ cost of sales × 365, or 365 ÷ inventory turnover rate |
| Stock coverage | Current stock ÷ average sales per week (or per day) |
Turnover looks at the past, coverage at the near future: the former indicates how quickly the stock sold, the latter how long the current stock will last. A falling turnover on a particular item is the first sign of dormant stock .
Example of stock turnover calculation
A department that sells €1.2 million worth of goods at cost over the year, with an average stock of €150,000, is turned over 8 times a year.
rotations per year: €1,200,000 ÷ €150,000.
rotation time: 365 ÷ 8.
of cash tied up on average in inventory.
Moving from 8 to 10 rotations with equal sales would free up €30,000 in cash (average stock reduced to €120,000).
Inventory turnover and margin: GMROI
A high margin is not enough: what matters is the margin relative to the money tied up in inventory.
| Product A | Product B | |
|---|---|---|
| Brand rate | 40% | 20% |
| Annual rotation | 3 | 10 |
| GMROI (gross margin ÷ average inventory at cost) | €2.0 margin per € of stock | €2.5 margin per € of stock |
GMROI (gross margin return on inventory) is calculated as annual gross margin ÷ average inventory at cost. Here, product B, with half the margin, generates more revenue per euro of inventory because its turnover is three times faster. This is a key criterion for deciding on product range and pricing: lowering a price can improve GMROI if the turnover increases sufficiently, which is measured by price elasticity . See also markup and gross margin .
The 3 common mistakes with inventory rotation
Mix the bases, smooth out the seasonality, or rely on the average.
- Mixing selling price and cost : dividing revenue by inventory valued at cost artificially inflates turnover.
- Calculating the average stock on only two points when the activity is seasonal: the stock at the beginning and end of the year masks the peaks, a monthly average is better.
- Relying on the average of a category : a good overall turnover may hide references that are no longer moving, which should be dealt with through markdowns before they lose their value.
Frequently Asked Questions
Short answers to the most frequently asked questions about inventory turnover.
What is inventory turnover?
Inventory turnover measures how many times a company's inventory is sold and replenished over a period, typically a year. It is calculated by dividing the cost of sales by the average inventory, both valued at their purchase cost. A turnover of 8 means that the inventory is replenished eight times a year, or approximately every 46 days. The higher the turnover, the less time the merchandise remains tied up in inventory, and the lower the cost in terms of cash flow, storage space, and the risk of unsold stock. It is always considered in conjunction with the profit margin: the combination of these two factors determines the profitability of the inventory.
How to calculate inventory turnover rate?
To calculate the inventory turnover rate, divide the cost of sales for the period by the average inventory for the same period, valued at cost: turnover rate = cost of sales ÷ average inventory. Example: a department that sold €1,200,000 worth of goods at cost for the year, with an average inventory of €150,000, has a turnover rate of 8. It can also be calculated in terms of units sold, divided by the average inventory in units. The important thing is to keep the same base, cost or selling price, in both the numerator and the denominator.
How do you calculate the average stock?
Average inventory is most easily calculated by adding the beginning and ending inventory for the period, then dividing by two: average inventory = (beginning inventory + ending inventory) ÷ 2. This method is sufficient for regular business activity. When business is seasonal, it distorts reality because inventory peaks before holidays or at the beginning of the season disappear from the average. In such cases, an average of monthly, or even weekly, inventory is calculated, which provides a much more accurate turnover rate. Inventory is valued at its purchase cost.
What is inventory turnover period?
Inventory turnover is the average number of days merchandise remains in stock before being sold. It is calculated as average inventory ÷ cost of sales × 365, or more simply as 365 ÷ turnover rate. A turnover rate of 8 thus corresponds to a turnover of approximately 46 days. This is a more meaningful way to understand inventory turnover, especially for cash flow: each day less inventory frees up cash. It is often compared to the product's shelf life, which is short for fresh produce or fashion items.
What is a good inventory turnover rate?
A good inventory turnover rate depends entirely on the sector and the product. Fresh produce, being perishable by nature, turns over very quickly; household goods, electronics, or luxury items turn over much more slowly, without this being a problem. The best benchmark is therefore the historical data for your category and that of your direct competitors, not an average across all sectors. More than the exact level, it's the trend that matters: a declining turnover for a particular item or category signals either over-purchasing or weakening demand.
What is the link between inventory turnover and profit margin?
Inventory turnover and margin combine in a single indicator, GMROI: the annual gross margin divided by the average inventory at cost, that is, the margin earned per euro tied up in inventory. A product with a 40% markup that turns over 3 times a year generates approximately €2 of margin per euro of inventory; a product with a 20% markup that turns over 10 times generates €2.50. Therefore, high turnover compensates for a lower margin. This is why a price reduction can improve inventory profitability if it sufficiently accelerates sales.
Key Takeaways
- Turnover rate = cost of sales ÷ average inventory , both at cost.
- Turnover time = 365 ÷ turnover rate , in days.
- Turnover and margin go together: GMROI measures the margin per euro of stock.
Do you want to adjust your prices taking into account your stock turnover?
Booper combines margin, turnover and elasticity to recommend the most profitable price, reference by reference.
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