Inventory Turnover Ratio Examples

Definition: Inventory Turnover Ratio (ITR, also known as Rate of Stock Turnover) is used to measure the rate in which the company is able to obtain cash from the sale of inventory. A high ratio will indicate an efficient management of inventory.

Formula:
Inventory Turnover Ratio = Cost of goods sold / Average inventory held
Or,
ITR = Cost of goods sold / Closing inventory
Or,
ITR = Net Sales / Average Inventory held

Example 1:
Marcus plc has the following information: cost of goods sold $50,000. The opening stock is $30,000 and the closing stock is $20,000. Then the Average stock would be (30,000 + 20,000) / 2 = $25,000; and the ITR would be (50,000 / 25,000) = 2 times

Example 2:
Calculate the rate of stock turnover using the following data:
Stock at start $27,000
Stock at end  $33,000
Total purchases $45,000
Purchase returns $5,000

Solution:
Net purchases = Total purchases - Purchase returns = 45,000 - 5,000 = $40,000
Cost of sales = Stock at start + Net purchases - Stock at end = 27,000 + 40,000 - 33,000 = $34,000
Average stock = (Stock at start + Stock at end) / 2 = (27000 + 33000) / 2 = $30,000
Rate of stock turnover = 34,000 / 30,000 = 1.13 times

* Next: Price Earnings Ratio (P/E) Examples