What is Inventory Turnover?
Inventory turnover is an efficiency ratio that measures how many times a company sells and replaces its inventory during a period. It is calculated by dividing cost of goods sold by average inventory. A higher turnover signals strong sales or lean stock management, while a low ratio may indicate overstocking or obsolescence.
How It Works
- Compute Cost of Goods Sold (COGS) for the period from the income statement.
- Calculate average inventory: (opening inventory + closing inventory) / 2.
- Divide COGS by average inventory to obtain turnover (in times per period).
- Convert to days: 365 / turnover = Days Inventory Outstanding (DIO).
- Benchmark against industry averages; grocery is 15 to 20, while heavy machinery may be 2 to 4.
Saudi Context
Saudi retailers, FMCG distributors, and food chains track inventory turnover closely to manage shelf space and prevent expiry, particularly for Ramadan and Hajj season demand spikes. ZATCA’s e-invoicing data plus point-of-sale integration with Qoyod gives real-time COGS, making weekly turnover reporting feasible for SMEs.
Example
A supermarket in Riyadh has COGS of SAR 36 million for the year, opening inventory of SAR 4 million, and closing inventory of SAR 5 million. Average inventory = 4.5 million. Inventory turnover = 36 / 4.5 = 8x, meaning stock is sold and replaced eight times a year, or roughly every 46 days.