What Is Inventory Turnover Ratio? Formula and Example

The inventory turnover ratio tells you the number of times you sold through your average inventory during a period. You calculate it by dividing your cost of goods sold by your average inventory. A turnover of 6 for a year means you bought and sold the equivalent of your average inventory six times. Dividing 365 by the turnover gives roughly the number of days your inventory sits before it sells.

The definition

OpenStax's Principles of Accounting, Volume 1: Financial Accounting (section 10.5, opened October 29, 2026) says:

"Inventory turnover ratio is computed by dividing cost of goods sold by average inventory. The ratio measures the number of times inventory rotated through the sales cycle for the period."

It pairs it with a second ratio: "Number of days' sales in inventory ratio is computed by dividing average merchandise inventory by the average daily cost of goods sold. The ratio measures the number of days it would take to clear the remaining inventory."

The formulas

• Average inventory = (beginning inventory + ending inventory) ÷ 2.
• Inventory turnover = cost of goods sold ÷ average inventory.
• Average daily cost of goods sold = cost of goods sold ÷ 365.
• Days' sales in inventory = average inventory ÷ average daily cost of goods sold.

OpenStax's worked figures calculate average inventory as the beginning and ending balances divided by 2, and average daily cost of goods sold as the year's cost of goods sold divided by 365. For a full year, days' sales in inventory works out the same as 365 ÷ inventory turnover.

The formula uses cost of goods sold, not sales. In the example below, both cost of goods sold and inventory are amounts at cost.

Worked example: a shop's year

The figures here are a sample. A home goods shop starts the year with $18,000 of inventory at cost, buys $124,000 of goods during the year, and ends the year with $22,000 of inventory.

1. Cost of goods sold: $18,000 + $124,000 − $22,000 = $120,000.
2. Average inventory: ($18,000 + $22,000) ÷ 2 = $20,000.
3. Inventory turnover: $120,000 ÷ $20,000 = 6.0 times.
4. Average daily cost of goods sold: $120,000 ÷ 365 = $328.77.
5. Days' sales in inventory: $20,000 ÷ $328.77 = 60.8 days. Check: 365 ÷ 6.0 = 60.8 days.

So the shop sold through its average inventory six times in the year, and an average item sat on the shelf about 61 days.

Reading the result

• Compare over time. OpenStax's example company fell from 1.19 to 0.84 times in a year. It calls this "not a positive trend," because it "would alert management that the inventory balance might be too high to be practical for this volume of sales."
• Compare with similar businesses. OpenStax says these ratios "should be compared to previous years' ratios for the company, direct competitors' ratios, industry ratios, and other industries' ratios." A useful comparison is to a business that sells similar goods.
• Watch for old inventory. OpenStax says days' sales in inventory "is useful to identify cases of obsolescence, which is especially prevalent in an evolving market."

Ways to improve turnover

When days' sales in inventory rises, OpenStax says "reduction in the inventory balance might be appropriate, or as an alternative, increased sales efforts could turn the ratio toward a more positive trend." In practice, that means one or both of these:

• Hold less inventory relative to what you sell, for example by buying in smaller quantities.
• Sell more of what you hold, for example by promoting slow-moving items.

Lower inventory raises the ratio only if sales hold up, so watch both numbers together. Your working capital and gross profit show the effect on cash and margin.

Where Billed fits

Billed's invoice software page says you can "save the products and services you sell so you can pull them into an invoice instead of retyping them," and "See which products and services are selling." Take your inventory and cost of goods sold figures from your accounting records, or ask your accountant.

Related Articles

• What Is Cost of Goods Sold and How to Calculate It
• What Is an Inventory System?
• What Is Financial Ratio Analysis?
• What Is Working Capital?
• What Is Gross Profit?

Frequently Asked Questions

How do you calculate inventory turnover ratio?

Divide your cost of goods sold by your average inventory. Average inventory is your beginning and ending inventory added together and divided by 2. A shop with $120,000 of cost of goods sold and $20,000 of average inventory has a turnover of 6.0.

What is days' sales in inventory?

It's how many days it would take to sell your average inventory. Divide average inventory by the cost of goods sold for an average day, which is cost of goods sold divided by 365. For a full year, it equals 365 divided by the inventory turnover ratio.

What does a falling inventory turnover ratio mean?

You're holding more inventory relative to what you sell. OpenStax says a drop like this "would alert management that the inventory balance might be too high to be practical for this volume of sales."

Why use cost of goods sold instead of sales?

OpenStax's formula puts cost of goods sold over average inventory, so both figures are amounts at cost. Using sales would mix your selling prices into the ratio.

What is a good inventory turnover ratio?

There's no single figure. OpenStax recommends comparing the ratio with your own previous years, direct competitors and your industry, so compare with businesses that sell similar goods.