Stock Turnover Ratio
What is Stock Turnover Ratio ?
The Stock Turnover Ratio, also known as Inventory Turnover Ratio, measures how efficiently a company manages its inventory by calculating how many times inventory is sold and replaced over a specific period. It helps businesses understand if they are overstocking or understocking.
Formula:
Stock Turnover Ratio= Cost of Goods Sold (COGS) / Average Inventory
Where:
COGS = Opening Stock + Purchases - Closing Stock
Average Inventory = (Opening Inventory + Closing Inventory)/2
Interpretation
High Ratio: Indicates efficient inventory management but might mean stockouts and lost sales if too high.
Low Ratio: Suggests slow-moving stock, which could lead to higher holding costs.
FAQs on Stock Turnover Ratio
1. What is a good Stock Turnover Ratio?
It depends on the industry. For example:
Retail & FMCG: High (10-15 times a year)
Manufacturing: Moderate (5-10 times a year)
Luxury goods: Low (1-3 times a year)
2. How can a business improve its Stock Turnover Ratio?
Optimize inventory levels using demand forecasting.
Implement just-in-time (JIT) inventory management.
Offer promotions or discounts to move slow-moving stock.
Improve supplier relationships for faster restocking.
3. What is the relationship between Stock Turnover Ratio and profitability?
A higher turnover ratio can lead to better cash flow and lower storage costs, potentially increasing profitability. However, it must be balanced with maintaining adequate stock levels.
4. How does Stock Turnover Ratio affect working capital?
A higher turnover ratio improves working capital efficiency by converting inventory into cash faster, reducing the need for excessive investment in stock.
5. Can Stock Turnover Ratio vary seasonally?
Yes, businesses with seasonal demand (e.g., apparel, holiday goods) may experience fluctuations in their turnover ratio.
6. How does Stock Turnover Ratio differ from Days Inventory Outstanding (DIO)?
Stock Turnover Ratio measures how often stock is sold.
Days Inventory Outstanding (DIO) calculates the average number of days inventory stays in stock before being sold:
