---
title: "What Is the Inventory Turnover Ratio?"
url: https://www.uncap.com/glossary/inventory-turnover-ratio
author: "Denis Dyli"
published: 2026-10-18
updated: 2026-10-18
summary: "The inventory turnover ratio is cost of goods sold divided by average inventory for a period such as a year. It shows how quickly a business sells its inventory: higher turnover reflects faster-moving stock. Long inventory holding periods can leave stock obsolete, while too little inventory can cause production stoppages and dissatisfied customers."
---

# What Is the Inventory Turnover Ratio?

> The inventory turnover ratio is cost of goods sold divided by average inventory for a period such as a year. It shows how quickly a business sells its inventory: higher turnover reflects faster-moving stock. Long inventory holding periods can leave stock obsolete, while too little inventory can cause production stoppages and dissatisfied customers.

**Inventory turnover ratio**: The inventory turnover ratio is cost of goods sold divided by average inventory for a period such as a year. It shows how quickly a business sells its inventory: higher turnover reflects faster-moving stock. Long inventory holding periods can leave stock obsolete, while too little inventory can cause production stoppages and dissatisfied customers.

## How it works

This page follows the Association of Chartered Certified Accountants (ACCA), a professional accountancy body, and labels general practice where it goes further. ACCA gives the ratio as:

- Inventory turnover = cost of sales / average inventory. In general usage, cost of sales is the same figure many US businesses call cost of goods sold.
- Inventory days = average inventory / annual cost of sales x 365. This estimates the time taken for inventory to be sold. It is the same as 365 divided by the annual turnover.

ACCA's ratio analysis article uses a close variant, the inventory holding period: inventory / cost of sales x 365 days. It measures how long a company carries inventory before it is sold. ACCA notes that working capital ratios are often easier to read in days than as a turnover figure.

Conventions vary:

- General practice: average the opening and closing inventory for the period, (opening + closing) / 2.
- Year-end only: in ACCA's exam guidance, when only year-end inventory is given, it is used as a proxy for the average.
- Days in the year: ACCA notes exam questions may assume 360 days in a year rather than 365.

Whichever convention you use, apply it the same way every period so the figures stay comparable (general practice).

## What the ratio tells you

- Low turnover (long holding period): more cash is tied up in inventory, and long inventory holding periods can result in obsolete stock.
- High turnover (short holding period): less cash is tied up in inventory. Push it too far, though, and too little inventory can result in production stoppages and dissatisfied customers.
- Comparisons: everything else being equal, ACCA says a business would prefer lower inventory days, but the industry average is also an important consideration. Industry average ratios are commonly published by business schools or consultancies.

## Example

Illustrative numbers only. An industrial distributor's cost of goods sold for the year is $1,200,000. Inventory at cost was $250,000 at the start of the year and $350,000 at the end.

- Average inventory = ($250,000 + $350,000) / 2 = $300,000.
- Inventory turnover = $1,200,000 / $300,000 = 4.
- Days to sell = 365 / 4 = 91.25, about 91 days.

Run the same math per product line. A fastener line with a turnover of 8 sells through in about 46 days (365 / 8 = 45.6). A specialty valve line at 1.5 takes about 243 days (365 / 1.5 = 243.3), so it is the one to review first.

## On Shopify

Shopify's profit reports show the total cost of the units sold in a period, but only for products and variants that had a cost per item recorded when they were sold. Cost per item is what the product costs you: for a resold product, the price you paid the manufacturer, excluding taxes, shipping and other costs.

For the inventory side, the Month-end inventory value report multiplies each variant's cost per item by its ending quantity. Starting October 1, 2026, Shopify's inventory reports measure stock by on hand quantity, which includes committed and unavailable units, instead of available quantity. The Inventory remaining per product report estimates days of inventory remaining: ending quantity divided by average units sold per day, based on the last 28 days.

Shopify notes that the cost per item field holds static data. For dynamic financial reporting, it suggests running reports in another business system, such as an ERP or accounting system, using a reporting app, or calculating manually.

## How Uncap helps

Uncap's guide to [managing millions of electronics SKUs](/post/managing-millions-electronics-skus) puts the ratio to work in SKU rationalization. It suggests identifying the bottom performers on profitability, inventory turnover and contribution to overall sales, flagging them for phase-out and discounting existing stock until it clears. The guide adds that rationalization works best when it feeds back into purchasing: if a category of SKUs consistently underperforms, buy less of it next cycle.

## Related terms

- Sell-through rate
- Safety stock
- Reorder point
- Backorder
- SKU (stock keeping unit)
- Warehouse management system (WMS)

## Sources

- ACCA: Working capital management
- ACCA: Ratio analysis
- Inventory reports, Shopify Help Center

## Frequently asked questions

### What is a good inventory turnover ratio?

Judge it against your own industry. Everything else being equal, ACCA says a business would prefer lower inventory days (higher turnover), but the industry average is also an important consideration, so compare your figure with published averages for your sector.

### What does an inventory turnover ratio of 1.5 mean?

Cost of goods sold for the period was one and a half times average inventory. Over a year, that is about 243 inventory days (365 / 1.5).

### Is 12 a good inventory turnover ratio?

A ratio of 12 is about 30 inventory days (365 / 12 = 30.4), so stock sells through roughly once a month. Whether that is good depends on how it compares with the industry average for your sector.