Inventory Turnover Ratio

Definition

The inventory turnover ratio measures how many times a business sells and replaces its entire inventory during a specific period, usually a year. A higher ratio indicates that goods are selling quickly, while a lower ratio suggests overstocking or slow-moving products. The ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory value. Indian businesses use this metric to evaluate the efficiency of their inventory management, identify dead stock, negotiate better terms with suppliers, and make informed purchasing decisions. Industries like FMCG and grocery typically have high turnover ratios, while automobile and jewellery businesses may have lower ratios. Monitoring this ratio helps prevent cash being tied up unnecessarily in unsold stock.

How It Works

1. 1Calculate your Cost of Goods Sold (COGS) for the period — this is the total cost of inventory that was actually sold, not total purchases.
2. 2Determine average inventory by adding opening stock and closing stock for the period, then dividing by two.
3. 3Divide COGS by average inventory to get the turnover ratio — this tells you how many times your entire stock was sold and replaced.
4. 4A higher ratio means faster sales and efficient inventory management, while a lower ratio may indicate overstocking or slow-moving products that need attention.

Example

How Stock Register Handles This

• View item-wise sales velocity and movement reports to identify which products turn over fastest and which are lagging
• Track opening and closing stock values automatically for any date range to calculate turnover ratios without manual work
• Compare turnover ratios across product categories to focus purchasing on high-demand items and reduce slow movers
• Generate stock overview reports that highlight non-moving items so you can take corrective action before capital gets blocked

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