Inventory Ratio Definition
Inventory ratios are used to measure a company’s inventory levels in relation to its sales. The most common inventory ratios are:
1) Days in inventory (also called days of supply or average age of inventory): This measures the number of days it would take to sell all of a company’s inventory at the current sales pace.
Formula: Days in Inventory = (Ending Inventory / Cost of Goods Sold) x Days in Period
2) Inventory turnover: This measures how many times a company sells and replaces its inventory during a given period.
Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory
3) Stockturn: This is simply the number of times per year that the average stock level held by a business is turned over. The formula for this is very similar to that for inventory turnover, with the main difference being that it uses 365 rather than the number of days in the chosen period.
Formula: Stockturn = 365 / Days In Inventory.
