The inventory turnover formula records how much product inventory is sold and replaced over a given period of time. This gives a company an accurate estimation of how long it takes to sell inventory and helps it make more calculated decisions on things like pricing, manufacturing, marketing, and stock.
A high inventory turnover ratio indicates robust demand for the product as inventory levels are sold and replenished frequently. Conversely, a low inventory turnover ratio means lower demand than what the company anticipated, leading to overstocking and higher inventory management costs. Hence, the speed at which a company can sell inventory is a key determinant of business performance.
Also known as the inventory turnover ratio, the inventory turnover formula can be calculated by computing the following equation: cost of goods sold for a period / average inventory for that period.
This will look like:
Inventory Turnover =Cost of Goods Sold for a Period Average Inventory