Inventory Turnover Ratio - Meaning, Formula, Calculation & Interpretations

This tutorial provides a comprehensive overview of the Inventory Turnover ratio, including its meaning, formula, calculations, and interpretation. Using a practical colgate case study example, we will learn how to calculate this inventory turnover ratio in excel.
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What is Inventory Turnover Ratio?
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The Inventory Turnover Ratio examines how quickly a company replaces its current inventory and converts it into sales. A higher ratio means the company's product is in high demand and sells quickly, resulting in fewer inventory management costs and more profits.
Formula
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Inventory Turnover Ratio Formula = Cost of Goods Sold / Average Inventory
Interpretation of Inventory Turnover Ratio
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High Inventory Turnover Ratio - This indicates that the company has done a good job of managing its inventory, with lower holding costs and fewer risks of obsolescence.
Low Inventory Turnover Ratio - This implies that the company's products aren't frequently sold in the market, and its inventory becomes slow-moving, resulting in higher inventory costs and lower earnings.
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