Forex Education

Trading industry knowledge. Learn forex trading, investing in stocks, commodities.

  • Home
  • Choose a broker
  • Brokers Rating
  • PAMM
  • Investment
  • Affiliate
  • Contact
  • About us
You are here: Home / Education / Finance education / Inventory Turnover Ratio

Inventory Turnover Ratio

by Fxigor

ShareTweet

Inventory Turnover Ratio

All retailers purchase and keep inventory which they sell to their customers. When a customer will make payment, the business will hand over the item to the customer for offline sales or ship the item to the customer for online sales. Businesses have to invest their money in purchasing inventory for their business so that they can supply their customers the products they require. One of the important challenges of running a business is predicting the items which are in demand, which the customers are interested in purchasing. Hence inventory management is a major task for the retail business

Definition

The Inventory Turnover Ratio (ITR) is a formula which is used to measure how effective the company is in converting the inventory of the business into sales. The retailer will incur expenses if they have a large inventory of products, and are unable to sell them quickly. The business will incur costs in storing the inventory which is not sold, and some of the items may also get damaged. Hence the business should measure the ITR periodically. If the ITR is lower than the industry norms, the business should consider lowering the inventory by increasing sales, reducing purchase of inventory

Formula

Inventory turnover is calculated as :

The Formula for ITR = Cost of Sales / Inventory.

The denominator in the formula is the inventory which is the average which is calculated over the period specified, which may be one month, three months or one year. The sales in the numerator are the average sales for the corresponding period, with the cost considered. If the ratio is being calculated for a period of one month, the corresponding sales and inventory figures for one month are considered. The ratio indicates how many times the business was able to sell its inventory over the period being considered, and a high ITR is preferred. It should be noted that considering the sales price of the items sold for calculation will not be accurate, since some businesses have high sales margin, and sell fewer items.

Inventory Turnover Ratio Calculator

Importance of ITR

The total turnover of the retailer depends on a number of factors. One of the most important factor is the stock which is purchased. If the business is purchasing a larger amount of inventory , it will also have to ensure that larger amounts of inventory are sold, to ensure that the turnover ratio improves or remains the same. If the business is unable to sell the additional inventory purchased, it will have to incur expenses for storing the inventory and other holding expenses like keeping the inventory in good condition, cleaning it.

The sales of the business are also affecting the ratio. Unless the sales are matching the increase in purchase of stock for inventory, the ratio will decrease for the business. Hence the sales and purchase department of the business must closely co-ordinate with each other to ensure that only items which can be easily sold are purchased. Items in the inventory which are not being sold for a long time should not be repurchased. The sales department can also initiate measures to sell the slow moving items. A high ITR indicates that the company is not wasting resources storing inventory which is not in demand.

Liquidity

The ITR is also closely monitored by investors who wish to find out how liquid the inventory of the company is. A retailer will report all the assets of the business in its balance sheet. The inventory of goods which are purchased for resale, is usually one of the largest assets for a business in terms of value. If this inventory cannot be sold easily, it is of limited value to the company. Items which cannot be resold are effectively of no value. The ratio indicates how easily a retail business can convert its inventory into cash sales, the control the company has on the merchandise it is selling.

Loans

Creditors are interested in finding the ITR for a business, because businesses are often offering their inventory as collateral for the loans which they take. Banks and other lenders would like to find out whether the inventory of the business can be easily sold, in case the business is unable to repay the loan. The ratio for inventory turnover varies greatly according to the industry. Garment retailers will have a higher ITR compared to designer car retailers.

  • Author
  • Recent Posts
Fxigor
Fxigor
Trader since 2007. Currently work for several prop trading companies.
Fxigor
Latest posts by Fxigor (see all)
  • Amazon Stock Forecast - April 15, 2021
  • What is Cash Inflow and Outflow?
  • How to Add Moving Average to RSI in Tradingview? - April 15, 2021

Related posts:

  1. Average Collection Period Interpretation
  2. Asset Turnover Ratio Calculator
  3. What is the Contribution Margin?
  4. What is Non-Cash Working Capital?
  5. How to Calculate Real Rate of Return with Inflation?
  6. What is the Payout Ratio – Dividend Payout Ratio Calculator
  7. Price-to-Sales Ratio
  8. Interest Coverage Ratio
  9. What is Debt Coverage Ratio Formula ?
  10. Net Debt-to-EBITDA ratio in Simple Words
  11. Payoff Ratio

Filed Under: Finance education

Website categories

Main Forex Info

  • Forex Calendar 2020
  • Forex Holidays Calendar 2021 – Holidays Around the World
  • Non-Farm Payroll Dates 2021
  • Key Economic Indicators
  • The Best Forex Brokers Ratings List
  • Top Forex brokers by Alexa Traffic Rank
  • Free Forex Account Without Deposit in 2021
  • Brokers That Accept PayPal Deposits
  • What is PAMM in forex? Are PAMM Accounts Safe?

Main navigation:

  • Home
  • About us
  • Forex brokers reviews
  • MT4 EA
  • Education
  • Privacy Policy
  • Risk Disclaimer
  • Contact us

Forex social network

  • RSS
  • Twitter
  • FxIgor Youtube Channel
  • Sign Up. Get newsletter.

Spanish language – Hindi Language

Spanish language website Hindi language website
Risk Warning: Trading leveraged products such as Forex and CFDs may not be suitable for all investors as they carry a high degree of risk to your capital. Trading such products is risky and you may lose all of your invested capital. Before deciding to trade, please ensure that you understand the risks involved, taking into account your investment objectives and level of experience.

Copyright Forex.in.rs 2007