Definition of Inventory Turnover

Inventory turnover is a financial ratio that is used to assess the inventory movement over a certain period of time. It typically means, how many times a business is able to convert its raw material into finished goods within a single accounting period.

The formula to measure the inventory turnover ratio is as follows:

Inventory Turn Over = (Cost of Goods Sold)/(Average Inventory)

Example of  Inventory Turnover:

A garments factory has an annual cost of goods sold of $500,000 and it maintains an average inventory worth $125,000 ready to sell garments. So using the above formula the inventory turnover for this garments factory is:

Inventory Turn Over = $500,000/$125,000=4.0 Times

In the above example, the garment factory is able to convert raw clothe into fully stitched garments four times a year. In other words, every three months i.e. called the inventory turnover period.