Inventory turnover (sometimes known as the stock turnover ratio) is a financial ratio that measures how many times a business has turned over its inventory within a given period. It’s an efficiency ratio, which measures how effectively a company utilises its resources.
The inventory turnover ratio isn’t just about how effectively a business sells its inventory. By analysing its inventory turnover, a business can make the best decisions about the following:
In other words, it’s an important strategic ratio that requires accurate calculation.
You can manually calculate the inventory turnover, although it may be a two-step process depending on whether you need to calculate the average inventory. For example, you might need to calculate the average inventory turnover for financial reporting or to ascertain a quick review of your company’s health.
Find the Cost of Goods Sold (COGS) and the change in inventory under the ‘Current Assets’ in the income statement. The COGS will include the change in inventory (rather than existing as a separate account).
Add the beginning and ending inventory values and divide by the total time period.
Hopefully, you will arrive at a value between 5 and 10, which reflects a healthy inventory turnover ratio (we’ll cover what a ‘healthy’ inventory turnover ratio means below).
The ideal inventory turnover rate varies by industry, as different sectors have unique stocking and sales patterns. For example, an inventory turnover ratio between 5 and 10 means the stock is overturned every one to two months. However, for some industries like groceries and pharmacies, the turnover will be higher due to spoilage.
End to end, the calculation process might take a few minutes, but the following processes can slow it down:
These processes make a relatively simple ratio calculation more arduous and time-consuming. Instead of considering what inventory supplies mean, relating to management, strategy and efficiency, talented analysts routinely waste time copying and pasting data and touching up spreadsheets.
However, we’ll show you how to calculate these ratios in under one minute.
Automation offers an accurate and swift way to complete these calculations. Now, there are a variety of AI-powered tools that can ‘read’ financial data like an analyst. Yet, ChatGPT may not be the answer.
Commercial AI models struggle to offer specialised, high-quality financial & business advice. Instead, they tend to veer towards generic platitudes.
Instead, AI is better for analytical functions, such as locating, extracting and calculating data. There are now a variety of specialised financial data tools that leverage trained AI. One example of such a tool is Financial Statements AI.
Let’s discuss how our analytical tool, Financial Statements AI, can reduce inventory turnover calculation to under one minute.
Financial Statements AI reduces inventory turnover calculation to under one minute and removes the ‘grunt work’ (i.e. formatting and structuring the data). Alongside the inventory turnover metrics, Financial Statements AI also captures all the other line items from an income statement, using them to compute other metrics like Operating Expenses (OPEX), Pretax Income and EBIT.
The inventory turnover ratio indicates a company’s efficiency in converting inventory into sales over a given period. Calculating the inventory turnover ratio requires carefully parsing the inventory values, which may prove time-consuming for busy analysts.
Reducing the calculation process to under one minute will give analysts time to analyse the data rather than repeatedly adding and subtracting values.
Interested in trying Financial Statements AI for free? Get started now.
