The inventory turnover ratio is an important efficiency metric and compares the amount of product a company has on hand, called inventory, to the amount it sells. In other words, inventory turnover measures how many times inventory has sold during a period.
How to Calculate Inventory Turnover
The inventory turnover ratio can be calculated by dividing cost of goods sold by the average inventory for a particular period.
The reason average inventory is used is that most businesses experience fluctuating sales throughout the year, so the use of current inventory in the calculation can produce skewed results. For example, inventory for retailers like Macys Inc. (M) might rise during the months leading up to the holidays and fall during the months following the holidays.
Average inventory is typically used to calculate inventory turnover to account for seasonal variations in sales. The average inventory is calculated by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by two.
Formula for the Inventory Turnover Ratio
Inventory Turnover = Cost Of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2)
Source : Investopedia