Stock Turnover Rate Calculator
What is Stock Turnover Rate?
The Stock Turnover Rate, also known as Inventory Turnover Ratio, is a key financial efficiency metric that measures how many times a company has sold and replaced its inventory during a specific period, typically a year. It provides insight into how effectively a business manages its stock and sales.
A higher turnover rate generally indicates strong sales and efficient inventory management, meaning goods are sold quickly. Conversely, a low turnover rate may imply weak sales, overstocking, or obsolescence issues.
How to Calculate Stock Turnover
To calculate the stock turnover rate, you need two primary figures: the Cost of Goods Sold (COGS) and the Average Inventory for the period.
Stock Turnover Ratio = Cost of Goods Sold / Average Inventory
Additionally, businesses often calculate the "Days Sales of Inventory" (DSI), which estimates how many days it takes to convert inventory into sales.
Why is Stock Turnover Important?
- Cash Flow Management: High turnover means inventory is converted to cash quickly, improving liquidity.
- Storage Costs: Holding inventory costs money (rent, utilities, insurance). Selling stock faster reduces these carrying costs.
- Product Freshness: For perishable goods or fast-fashion, a high turnover rate is critical to prevent spoilage or obsolescence.
- Profitability Analysis: It helps identify which products are performing well and which are stagnant.
Example Calculation
Let's assume a retail clothing store has the following financial data for the fiscal year:
- Cost of Goods Sold (COGS): $500,000
- Beginning Inventory: $40,000
- Ending Inventory: $60,000
Step 1: Calculate Average Inventory
($40,000 + $60,000) / 2 = $50,000
Step 2: Calculate Turnover Ratio
$500,000 / $50,000 = 10
This means the store sold and replenished its entire inventory 10 times during the year.
Step 3: Calculate Days to Sell
365 / 10 = 36.5 days
On average, it takes the store about 36.5 days to sell its inventory.
Frequently Asked Questions
What is a "good" stock turnover rate?
There is no single number that applies to all industries. Grocery stores typically have very high turnover rates (often 10-14 or higher) due to perishable goods. High-end luxury car dealerships might have much lower rates (2-3). It is best to compare your ratio against industry benchmarks.
Is a high turnover rate always good?
Usually, yes, but an extremely high rate might indicate that you are understocking and missing out on potential sales due to inventory shortages. Finding the right balance is key.