What inventory turnover tells you
Cost of goods sold is what the goods sold during the period cost the business. Inventory is the stock it holds on a given date, which for a manufacturer includes raw materials and work in progress as well as finished goods. The balance sheet carries inventory at cost, so the ratio divides by cost of goods sold rather than sales to compare like with like.
A result of 6.00 means the business sold an amount equal to its average inventory six times during the period. Over a 365-day year, that means stock was held for about 61 days on average before it was sold. That day count is called days inventory outstanding, and it is one of the three parts of the cash conversion cycle.
Reading a high or low result
What is normal depends on what the business sells. Perishable or everyday goods usually turn over far more often than expensive items that customers buy rarely.
- A higher turnover means inventory sells faster relative to the amount held, so less cash is tied up in stock. It can also mean the business holds too little and loses sales when items run out.
- A lower turnover can point to slow-moving or obsolete stock, over-buying or weaker demand. It may also be deliberate, for example building stock ahead of a busy season or keeping a wide range on hand.
Compare the ratio with the same business in earlier periods, or with businesses that sell similar goods.
What counts as a good inventory turnover
No single figure suits every business, but you can see where a result sits among real companies. In 2025, the median inventory turnover of 1,624 companies listed in the US was 4.02. The middle half of them fell between 2.31 and 7.94.
Industry matters more than any rule of thumb. The median was 34.52 in construction, but 1.97 in medical devices and supplies.
- All industries 1,624 companies4.02 2.31–7.94
- Construction 18 companies34.52 17.67–97.26
- Business services 25 companies15.40 7.71–43.17
- Utilities and waste services 22 companies14.91 8.17–29.94
- Scientific and measuring instruments 54 companies2.52 1.88–4.01
- Pharmaceuticals and biotech 141 companies2.00 1.03–3.36
- Medical devices and supplies 145 companies1.97 1.36–3.07
Measured from US GAAP financial statements filed with the SEC: income statements for each company's financial year closest to calendar 2025, with balance sheets at the end of 2024 and 2025 averaged. Banks, insurers and brokers are left out: their revenue, costs and borrowing work differently from other businesses. Only companies that report inventory are included. These are public companies, so smaller private businesses can look different. Compare with businesses like yours, and with your own earlier periods. See all 27 industries and how the figures are measured.
To see one listed company’s inventory turnover for each of its last five years, worked out from its filings, use the company ratio lookup.
How to improve inventory turnover
Turnover rises when the business sells the same amount from less stock. The aim is enough stock to meet demand, not the least stock possible.
- Order smaller quantities more often. Frequent, smaller orders keep average stock lower, as long as suppliers can deliver reliably and order costs stay reasonable.
- Clear slow-moving stock. Items that have not sold for months hold turnover down. Discounting them, returning them to suppliers or bundling them frees cash and space.
- Forecast demand from sales data. Ordering from past sales by product and season, rather than habit, reduces both excess stock and shortages.
- Narrow the range. Products that rarely sell still need stock on the shelf. Dropping them raises turnover for the range as a whole.
Turnover that rises because the business runs out of stock is not progress. Watch for missed sales and rush orders alongside the ratio.
Inventory turnover in a real 10-K
Here is the calculation with the figures from a real annual report, set against other listed companies.
Costco’s annual report for the year to 30 August 2026 shows cost of goods sold of $264.3 billion and average inventory of $18.7 billion. On those figures, the inventory turnover is 14.12. Against the 2025 figures for listed companies, that is higher than about 95% of companies in general merchandise and home retail, and higher than 85% of all US-listed companies.
| Cost of goods sold | 264,279 |
|---|---|
| Inventory at 30 August 2026 | 19,324 |
| Inventory at 31 August 2025 | 18,116 |
| Average inventory | 18,720 |
| Inventory turnover | 14.12 |
Figures as reported in Costco's Form 10-K filed on 7 October 2026, read from the SEC's XBRL data. The example shows the calculation; it is not a view on the company or its shares.
What the ratio does not show
- It is an average across every product. A few fast sellers can hide lines that have not moved for months.
- The method used to assign costs to inventory, such as first-in, first-out or weighted average cost, changes both cost of goods sold and the inventory balance when prices are moving.
- Writing down damaged or obsolete stock lowers the inventory balance and can make turnover look faster without any change in sales.
- It says nothing about the margin earned on what was sold.
Accounting details that change the result
- Cost of goods sold or sales. Inventory is held at cost, so the calculator divides cost of goods sold by it. Using sales instead, as some sources do, inflates turnover by the size of the markup.
- LIFO inventory. Under LIFO, which US GAAP allows and IFRS does not, the balance sheet can carry inventory at old, lower costs. That makes turnover look higher. LIFO companies disclose a LIFO reserve, which can be added back to compare them with FIFO companies.
- Write-downs. Inventory is written down when it is worth less than it cost: to the lower of cost and net realizable value under IAS 2, and under US GAAP for FIFO and average cost (ASC 330). A write-down cuts inventory and adds to cost of sales, so turnover jumps without any change in how stock moves.
- Seasonal stock levels. Many retailers end their financial year after the busiest season, when stock is at its lowest. Averages of monthly or quarterly balances give a truer picture than opening and closing figures.
Average vs ending balances
Cost of goods sold covers the whole period, but inventory is counted on a single date. Averaging the opening and closing balances gives a fairer match, especially when stock levels rose or fell during the year. To use the average, open “Add opening balances to use averages” and enter inventory at the start of the period. If you leave it blank, the calculator divides by ending inventory, which gives a different answer whenever inventory changed. Even an average of two dates can miss a seasonal peak, so treat the result as an approximation for a seasonal business.
Common mistakes
- Dividing revenue by inventory. Some sources do this, but it mixes selling prices with costs and gives a higher figure, so it cannot be compared with the cost-based ratio. Check which version a published figure uses.
- Using a quarter’s cost of goods sold and comparing the result with annual figures. A quarterly turnover is much lower simply because the period is shorter.
- Comparing businesses that value their inventory with different cost methods.
- Treating a higher figure as always an improvement. Running stock too low can cost sales and customers.
Practice questions
1. Cost of goods sold for the year was $1,200,000. Inventory was $180,000 at the start and $220,000 at the end. What is inventory turnover, and how many days of stock does that mean?
Show the answer
Average inventory: (180,000 + 220,000) ÷ 2 = 200,000. Turnover: 1,200,000 ÷ 200,000 = 6.00 times. Days: 365 ÷ 6 = 60.8 days.
2. The business cuts average inventory to $150,000 and sells the same amount. What are turnover and days now?
Show the answer
Turnover: 1,200,000 ÷ 150,000 = 8.00 times. Days: 365 ÷ 8 = 45.6 days, and $50,000 less is tied up in stock.
Questions about inventory turnover
How do I turn inventory turnover into days?
Divide the days in the period by the turnover: 365 ÷ 6 = 60.8 days. That figure is days inventory outstanding, one part of the cash conversion cycle.
Is a higher inventory turnover always better?
No. It can mean lean, well-managed stock, or it can mean the business keeps running out. Very low turnover can mean slow-moving or obsolete stock.
Why use average inventory?
Cost of goods sold covers the whole year, while inventory is a single date. The average of opening and closing stock matches the two more closely.
Related measures
The cash conversion cycle combines the days inventory is held with the time taken to collect from customers and to pay suppliers. Days payable outstanding uses the same cost of goods sold to measure how long the business takes to pay for what it buys. Asset turnover takes the wider view and compares revenue with all assets. The quick ratio leaves inventory out of its liquid assets because stock can take time to sell.