The Stock Turnover Ratio is also termed as Inventory Turnover Ratio. It shows how many times a company sells and subsequently refills inventory in a given period of time. Knowing the stock turnover ratio provides crucial information to businesses regarding the trends of demand, buying patterns, and even the utilization of warehouse space. Effective inventory management is essential for enhancing a business’s operational efficiency. One of the most effective tools is the turnover ratio.
What Is the Stock Turnover Ratio?
The stock turnover ratio shows the number of times a specific company’s assets have been sold and then replaced over a given period. It is determined by the total sales of that asset divided by the average amount of inventory the company holds throughout that period. This ratio captures how quickly a company replenishes its product following a sale over a specific period.
High turnover ratio means a company sells their product fast and refills the inventory regularly. A lower ratio would signify stagnant growth in sales and issues related to product overstocking.
Stock Turnover Ratio Formula & Calculation
1. Calculate Cost Of Goods Sold
    Cost of goods sold = (Opening inventory + Purchases) – (closing inventory)
2. Calculate Average Inventory
Stock turnover ratio Formula = Cost of goods sold / Average Inventory
Average Inventory = Opening Inventory + Closing inventory / 2
3. Apply Formula
Stock Turnover Ratio = Cost of goods sold / Average Inventory
Now let’s discuss with an example
Opening Inventory = Rs 200,000
Purchase all over the year = Rs 300,000
Closing Inventory = Rs 70,000
Cost of goods sold = (200,000 + 300,000) – 70000 = Rs 4,30,000
Average Inventory = 200000 + 300000 / 2 = 250,000
Turnover ratio = Â Cost of goods sold / Average Inventory = 1.72
The company sells and replenishes inventory 1.72 times in a year.
Types of Stock/Inventory Turnover Ratio and What They Mean for Your Business
1. High Stock Turnover Ratio
It indicates that the inventory is sold out quickly as there is a high demand for products in the market. It is an ideal ratio for fast-moving goods like groceries, dairy products and many more.
However, businesses must take care that they are not sacrificing availability or customer satisfaction due to consistently low inventory levels.
2. Low Stock Turnover Ratio
Low Turnover Ratio means that the inventory is sold slowly. It indicates poor sales and inventory planning and can lead to outdated stock.
A low turnover ratio usually reflects inefficiencies in inventory management or poor product demand. It’s not always negative in every scenario, but businesses should analyze the cause and take corrective steps to avoid it.
3. Average Turnover Ratio
An average ratio indicates that the business is selling and restocking at a stable pace. It suggests that the business will not have stockout or overstocking problems. When the stock turnover ratio lies between 4 to 6 then it indicates the average ratio.
An average inventory turnover ratio usually reflects healthy inventory management. It’s a good sign for businesses that want stable sales without the extremes of fast or slow-moving stock.
Benefits of Calculating Stock Turnover Ratio
The benefits of calculating the stock/inventory turnover ratio are underlined below.
1. Effective Inventory Management
A high turnover ratio indicates strong sales, while a low turnover ratio indicates lower sales and overstocking. A business can manage inventories efficiently by calculating the stock ratio.
2. Reduces Cost
Businesses need to spend less on storage costs if there is a high stock turnover ratio. It even avoids spoilage and wastage in the warehouse.
3. Build Strong Relationships With Suppliers
A high stock turnover ratio can build strong relationships with the suppliers. They restock the required inventories quickly and avoid overstocking problems.
How To Optimize Stock Turnover?
A good Stock Turnover considers various factors, which we will discuss below.
- Sales forecasting: It helps reduce the risk of excess inventory or stock outs. Use market trends, historical data, and seasonal demands to make accurate predictions.
- Software & Tools: Digital tools enable real-time inventory tracking, automated reordering, and various report generation. Enhanced control and better decision-making are achieved with tighter control over inventory.
- Set Stock Levels: Set precise limits for every item to prevent the accumulation of excess or deficient inventory. This ensures optimal stock movement.
- Adopt Just-in-Time (JIT) Inventory: By adopting just-in-time inventory management, a business can improve its techniques for managing stock control.
- Priorities Fast-Moving Items: Support your identified best-selling items by ensuring they are always available. Segment and manage inventory using techniques like ABC analysis.
- Offer Promotions or Discounts: Take proactive measures to remove slow movers. Seasonal sales, combo offers, or discounts can help boost your stock turnover ratio.
- Conduct Regular Stock Audits: Performing physical inventory audits helps detect and match system records, thereby preventing dead stock from accumulating unnoticed.
Final Words
The stock turnover ratio is an indicator of sales performance in a business. It allows businesses to manage stock, reduce holding costs and improve the cash flow of business.
Optimizing your inventory turnover ratio is all about stock balance—meeting demand without overcommitting resources. With the right strategies, tools, and mindset, businesses can improve efficiency, reduce costs, and serve customers better.
AAJ Supply Chain Management
