# Inventory Turnover Ratio

This ratio measures how fast a material moves — how many times the average stock is consumed during a period. Computing and comparing turnover ratios for different materials gives useful guidance on inventory performance.

## Formula

$$\text{Inventory Turnover Ratio} = \frac{\text{Cost of materials consumed during the period}}{\text{Cost of average stock held during the period}}$$

where:

$$\text{Average Stock} = \frac{1}{2}(\text{Opening Stock} + \text{Closing Stock})$$

## Average Holding Period

$$\text{Average no. of days of inventory holding} = \frac{365 \text{ days (or 12 months)}}{\text{Inventory Turnover Ratio}}$$

## Interpretation

High turnover ratio → the material is fast-moving (good, efficient use of working capital).
Low turnover ratio → over-investment and locking up of working capital in slow-moving / dormant stock.

Worked example

### Example 1

Computing turnover and holding days

Materials consumed during the year = ₹6,00,000. Opening stock = ₹40,000; Closing stock = ₹60,000.

Average stock = ½ (40,000 + 60,000) = ₹50,000.

Inventory Turnover Ratio = 6,00,000 ÷ 50,000 = 12 times.

Average holding period = 365 ÷ 12 ≈ 30 days. The material turns over once a month — a fast-moving item.

⚠️ Common exam mistakes

Using sales value instead of cost of materials consumed in the numerator.
Taking only the closing stock instead of the average of opening and closing stock in the denominator.
Misreading a low ratio as good — a low ratio signals slow-moving stock and tied-up working capital.

Reference:

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