How to Calculate Inventory Turnover Ratio

Inventory Turnover is an efficiency ratio that measures how many times a company has sold and replaced its inventory during a specific period. It is a vital health metric for retail and e-commerce businesses because it shows how well the company is managing its stock and responding to market demand. The ratio is calculated by dividing the Cost of Goods Sold (COGS) by the average inventory value. A high turnover ratio is generally positive, signaling strong sales and efficient capital usage—your money isn’t ‘sitting on a shelf.’ However, if the ratio is too high, it might indicate that the company is under-stocked and losing revenue to ‘Out-of-Stock’ events. A low ratio suggests over-ordering, poor product-market fit, or obsolete inventory that is draining cash through storage costs. Mastering inventory turnover allows businesses to maximize their ‘Cash Flow Cycle’ and ensure that their capital is always working for them.