How is the inventory turnover ratio calculated?
There is a mathematical formula for calculating the stock turnover rate:
IT = UP x IS / IC
Where:
ITR: is the inventory turnover rate;
UP: is the unit selling price.
IS: items sold
AIC: represents the average inventory cost.
For example, imagine an e-commerce selling products with a cost value of £ 650,000 (UP x IS). When the period started, the initial inventory was £300,000, and when the period ended, the ending inventory was £350,000.
In this case, the average value of the stock in the warehouse is as follows:
AIC = (300,000 + 350,000) / 2 = £325,000.
And, consequently, the ITR will be as follows: 650,000 / 325,000 = 0.46.
This IT is the inventory turnover ratio. That is, during the reference period, which is usually the year, the inventory has been renewed 2 times. This, of course, is an average figure with all the company's stock, but it is possible that for some items the ITR could be higher or lower.
