The inventory turnover ratio measures how many times a business sells and replaces its entire stock over a period, usually a year. A high ratio means inventory moves quickly; a low ratio means goods sit on the shelf for a long time, tying up cash and risking obsolescence.
Inventory turnover formula
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Average inventory is usually (opening inventory + closing inventory) ÷ 2.
Worked example
A Lahore pharmacy has COGS of Rs. 12,000,000 for the year and average inventory of Rs. 2,000,000. Inventory turnover = 12,000,000 ÷ 2,000,000 = 6. The pharmacy sells through and replaces its stock six times a year — roughly once every two months. Dividing 365 by 6 gives about 61 days of inventory on hand.
Why inventory turnover matters
Turnover reveals how efficiently capital is working. A rising ratio frees up cash and reduces the risk of dead stock, while a falling ratio is an early warning of overstocking or weak demand. What counts as “good” varies by industry — a grocery turns over far faster than a furniture showroom — so always compare against sector norms and your own trend.
EloERP calculates turnover automatically per product, category, and branch, helping you spot slow movers early and reinvest in the lines that actually sell.
Related glossary terms
Frequently asked questions
What is a good inventory turnover ratio?
It depends heavily on the industry. Fast-moving sectors like groceries may turn over 10–15 times a year, while high-value goods such as furniture or jewellery may turn 2–4 times. The right benchmark is your own industry average and your historical trend, not a single universal number.
What does a low inventory turnover ratio indicate?
A low ratio usually signals overstocking, weak demand, poor purchasing, or obsolete products. It means cash is tied up in inventory that is selling slowly, which raises holding costs and the risk of dead stock.
How is inventory turnover related to days inventory outstanding?
They are two views of the same thing. Days Inventory Outstanding (DIO) = 365 ÷ inventory turnover. A turnover of 6 equals about 61 days of stock on hand. DIO expresses turnover in days, which many managers find easier to act on.