Inventory turnover
In one sentenceCost of goods sold divided by average inventory; it shows how many times inventory is sold and replaced during the period.
Simply put
The ratio answers the question: how many times did you sell and replace your inventory this year? The higher it is, the less money is tied up on the shelves.
Compare it with your own business over the years, or between your items and branches; a vegetable shop naturally turns over its inventory much faster than a furniture shop.
Worked example
A store with an annual cost of sales of 600,000 SAR, opening inventory of 140,000 SAR and closing inventory of 160,000 SAR.
Average inventory(140,000 + 160,000) ÷ 2 = 150,000 SAR
Cost of goods sold600,000 SAR
Turnover = 600,000 ÷ 150,0004 times
Formula: Cost of goods sold ÷ average inventory
Don't confuse it with
Days inventory on handThe same indicator expressed differently: 4 times a year means inventory covers about 91 days.