Microlesson · 5-min read

Inventory Turnover Ratio

## Inventory Turnover Ratio

The Inventory Turnover Ratio shows how many times the company has converted its inventory into sales during a period.

### Formula

$$\text{Inventory T/O Ratio} = \frac{\text{COGS or RM Consumed}}{\text{Average Inventory}}$$

### Supporting Calculations

$$\text{RM Consumed} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock}$$

$$\text{Average Inventory} = \frac{\text{Opening Stock} + \text{Closing Stock}}{2}$$

### Days Inventory is Held

$$\text{Days Inventory Held} = \frac{360}{\text{Inventory T/O Ratio}}$$

### Interpretation

Worked example

### Example 1

Example: Opening stock = ₹50,000; Closing stock = ₹70,000; Purchases = ₹3,80,000.

RM Consumed = 50,000 + 3,80,000 − 70,000 = ₹3,60,000

Avg Inventory = (50,000 + 70,000) / 2 = ₹60,000

Inventory T/O Ratio = 3,60,000 / 60,000 = 6 times

Days Inventory Held = 360 / 6 = 60 days

Using closing stock alone (or opening stock alone) instead of the average.
Using sales value instead of COGS in the numerator — sales include profit and distort the ratio.
Using 365 days when the syllabus / question convention is 360 days.

Reference:

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