How to calculate inventory turnover ratio (and what a healthy number looks like)

Inventory turnover ratio answers one of the most important questions in your business: how many times a year do you sell through your stock? It is a direct measure of how fast your cash recycles, and once you start watching it, slow movers and trapped cash become impossible to ignore. Here is how to calculate it, what a healthy number looks like, and how to improve it.

The formula

Inventory turnover = cost of goods sold ÷ average inventory value (at cost)

Average inventory smooths out the peaks and valleys across the period:

Average inventory = (beginning inventory + ending inventory) ÷ 2

If your sales are seasonal, average more data points, monthly snapshots across the year give a truer picture than just the start and end.

Use COGS, not revenue

The single most common mistake is dividing revenue by inventory. Inventory is recorded at cost, so mixing it with retail prices inflates the ratio and flatters you. Keep both sides in the same units: cost of goods sold over average inventory at cost.

A worked example

Suppose over the last year:

• Cost of goods sold: $600,000
• Average inventory at cost: $150,000

Inventory turnover = $600,000 ÷ $150,000 = 4. You sold through your average stock four times in the year.

Turn it into days of inventory

Turnover is easier to feel when you convert it into days. Days of inventory (also called days sales of inventory) tells you how long your average stock lasts:

Days of inventory = 365 ÷ inventory turnover

A turnover of 4 is about 91 days of stock on hand. A turnover of 6 is about 61 days. Lower days means leaner inventory and faster cash, as long as you are not cutting it so fine that you stock out.

What is a healthy number?

It varies widely by category, so treat any single figure with suspicion. As a rough guide, many ecommerce and retail businesses aim for somewhere around 4 to 6 turns a year. Fast-moving consumer goods and groceries run much higher; big-ticket, seasonal, or luxury items run lower, and that is fine. The two comparisons that actually matter are against your own history (is it trending up?) and against similar products in your own catalog.

Turnover and margin both matter

A high turnover is not automatically good if you are selling at razor-thin margins, and a slow turner can still be worth carrying if its margin is rich enough. The metric that captures both at once is GMROI, which is why we lean on it for reorder decisions. We break that down in how to calculate inventory ROI.

How to improve your turnover

• Clear dead stock. Slow movers drag your average inventory up and your turnover down. They are also where your carrying cost concentrates.
• Forecast demand more tightly so you buy closer to real sell-through instead of padding every order. See our forecasting guide.
• Right-size safety stock and reorder points per SKU rather than holding one blanket buffer across the catalog.
• Buy by return on cash. Fund the products that turn quickly first, so your money is never parked in something that sits.

Watch it without the spreadsheet

InventoryIQ tracks turnover and days of inventory per SKU from your real sales history, surfaces the slow movers dragging your average down, and ranks reorders by return on cash so your money keeps recycling. Estimate your savings or start a free trial to see your own numbers.