Turnover of merchandise ratio

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The Turnover of merchandise ratio is derived from the following formula:

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Formula

\mbox{ }\frac {\mbox{Merchandise cost of sales}} {\mbox{Average inventory of finished goods}}


or if using sales prices for the inventory:

\mbox{ } \frac {\mbox{Sales}} {\mbox{Average inventory (sales price) of finished goods}}


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Results

The resulting figure provides the number of times the inventory is replaced during a given period. It is usually stated as a number of time per year or as an average length of time per turnover. For example, a turnover of three times per year might be stated as four months. A period over period comparison affords a valuable indication as to the efficiency of inventory control. A slow turnover means an overinvestment in inventory. A high turnover contributes to a favorable showing for capital turnover.

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