What is Inventory Turnover Ratio?
The inventory turnover ratio is an efficiency metric that measures how many times a company sells and replaces its inventory during a specific period. It equals cost of goods sold divided by average inventory. A higher ratio suggests strong sales and lean stock holding, while a low ratio may indicate overstocking, obsolescence, or weak demand.
How It Works
- Calculate average inventory: (opening + closing) / 2.
- Inventory Turnover = COGS / Average Inventory.
- Days Inventory Outstanding (DIO) = 365 / Turnover.
- Compare against industry benchmarks: grocery 15-20, electronics 6-10, heavy machinery 2-4.
- Track trend: rising turnover signals improving efficiency; falling turnover signals trouble.
Saudi Context
Saudi retail and FMCG operators monitor turnover closely to control expiry waste and warehouse cost, especially around demand spikes for Ramadan, Eid, and Back-to-School seasons. ZATCA’s e-invoicing infrastructure plus integrated POS in Qoyod enables real-time COGS, making weekly turnover reporting feasible for SMEs.
Example
A pharmacy chain has COGS of SAR 24 million for the year, opening inventory of SAR 3 million, and closing inventory of SAR 5 million. Average inventory = 4 million. Turnover = 24 / 4 = 6x. DIO = 365 / 6 = 61 days, suggesting stock sits on shelves about two months on average.