Otherwise, the ending balance can be used instead. If using the average inventory balance, both the beginning and end of period balance sheets are necessary. The formula to calculate the stock turnover ratio is as follows.Īverage Inventory = (Beginning Inventory + Ending Inventory) ÷ 2 in a year-over-year analysis)- as well as to that of its industry peer group - which are both practical methods to derive insights into the management team’s inventory management decisions and future business trajectory. The stock turnover ratio of a company can be compared relative to historical trends (i.e. Step 2: Divide Cost of Goods Sold (COGS) by Average Inventory.Step 1: Calculate Average Inventory (Beginning and End of Period Balance).The steps for calculating the ratio are as follows: Since the stock turnover ratio counts the number of times that a company needed to replenish its inventory, a higher ratio implies that the company is converting inventory purchases into revenue more efficiently (and vice versa for a lower turnover ratio). The term “stock” refers to the inventory owned by a company and is recorded as a current asset on the balance sheet, as the company expects to cycle through this inventory within the next twelve months. The stock turnover ratio is a method to measure a company’s operating efficiency at converting its inventory purchases into customer sales. How to Calculate Stock Turnover Ratio (Step-by-Step) The Stock Turnover Ratio determines the frequency at which a company must replace its inventory on hand over a given time horizon.
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