Stock turnover rate
The stock turnover rate is a financial ratio that measures the number of times a company sells and replaces its inventory in a specific period. It can be calculated by dividing the cost of goods sold by the average inventory value. A high stock turnover rate indicates that a company is efficiently managing its inventory and generating revenue at a rapid pace. Conversely, a low stock turnover rate may indicate that a company is having trouble selling its inventory and may be carrying too much stock.
The stock turnover rate, also known as inventory turnover ratio, is a financial metric used to measure the efficiency of a company in managing its inventory. It indicates how many times a company's inventory is sold and replaced within a given period of time, typically within a year.
To calculate the stock turnover rate, you need the following information:
1. Cost of goods sold (COGS) or cost of sales: This represents the cost incurred by the company to produce or acquire the goods sold during the period.
2. Average inventory: This is the average value of the inventory held by the company during the period. It can be calculated by adding the beginning and ending inventory values and dividing it by two.
Once you have these details, you can use the following formula to calculate the stock turnover rate:
Stock Turnover Rate = COGS / Average Inventory
For example, if the COGS for a company is $500,000 and its average inventory value is $100,000, the stock turnover rate would be:
Stock Turnover Rate = $500,000 / $100,000 = 5
This means that the company sells and replaces its inventory approximately 5 times within the given period, indicating a higher rate of inventory turnover. A higher stock turnover rate generally indicates efficient inventory management, while a lower rate may suggest slower sales or excess inventory.