The inventory turnover ratio, also known as the stock turnover ratio, is an efficiency ratio that measures how efficiently inventory is managed.
It establishes a relationship between the revenue cost, more commonly known as the cost of goods sold and average inventory carried during the period.
This ratio explains how much of stock held by the business has been converted into sales. In simple words, the number of times the company sells its inventory during the period.
USES OF STOCK TURNOVER RATIO :-
The stock turnover ratio is used almost everywhere, whether making business decisions, or while borrowing a loan, or while valuing a firm or when comparing goods, etc.
A high inventory turnover ratio implies that a company is following efficient inventory control measures along with sound sales policies. It explains how successful a company is converting the stock into sales. The higher ratio is a positive sign for any business.
On the other hand, a low inventory turnover ratio indicates lack of demand, outdated products , poor selling strategies etc.
FORMULA FOR STOCK TURNOVER RATIO :-
The formula for calculating stock turnover ratio is a s follow :-
Stock Turnover Ratio Formula =
Cost of Goods Sold /Average Inventory
Cost of goods sold is the cost of revenue from operations/sales. It is derived simply by reducing the profit from the revenue generated.
Average Inventory is the mean of opening stock and closing stock .
It is calculated as :-
Average Inventory = Opening Stock + Closing Stock / 2
Cost of Goods sold = Rs 40,000
Stock at beginning of period = Rs 5,000
Stock at the end of period = Rs 15,000
Calculate the inventory turnover ratio.
Here, Average Inventory =
Opening Stock + Closing Stock/2
i.e Rs 5,000 + 15,000 / 2 = Rs 10,000
Hence, Inventory Turnover Ratio = Rs 40,000 / Rs 10,000
= 4 : 1
Thus, in simple words Stock turnover ratio is a ratio that measures the number of times inventory is sold or consumed in a given time period & reflects the company’s efficiency in managing its stock of goods.