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 the result with your own past periods; a reasonable rate varies by activity.
- Track trend: rising turnover signals improving efficiency; falling turnover signals trouble.
To work out your own ratio and days, use the COGS calculator.
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. In Qoyod, a stocked product is costed at average cost when it is sold, and the cost of goods sold total appears in the income statement.
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.