Inventory turnover ratio (Varude käibekordaja) measures the efficiency of using inventory or materials. A higher inventory turnover ratio indicates more efficient and faster use of inventory (less money tied up in inventory).
$$Inventory\; turnover\; ratio \mmlToken{mo}[linebreak="auto"]{=} \frac{Sales\; revenue}{Average\; inventory}$$
or
$$Inventory\; turnover\; ratio \mmlToken{mo}[linebreak="auto"]{=} \frac{Cost\; of\; goods\; sold}{Average\; inventory}$$
The second variant may be more precise, but the cost of goods sold (COGS) is often more complex to determine than sales revenue. Additionally, using sales revenue ensures better comparability across different companies. The inventory turnover ratio can easily be used to derive the inventory turnover period as well.
Inventory Turnover Ratio FAQ
What is inventory turnover ratio?
It measures how efficiently inventory is sold and replaced.
How do you calculate it?
Divide sales revenue or COGS by average inventory.
