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).
- Compare the result with your own past periods; a reasonable rate varies by activity.
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. In Qoyod, the cost of a stocked product is recorded to cost of goods sold on sale using the average cost method, and the total appears in the income statement.
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. To work out your own turnover and days, use the COGS and inventory turnover calculator.