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Inventory Turnover Ratio (ITR), often referred to as Stock Turnover Ratio, is a financial ratio that shows how effectively a company is managing its inventory, measuring how many times it can sell and replace its entire inventory in a given period of time (typically a year). In simple terms, if a retailer is selling tomatoes, ITR tells them how often they sell those products and need to restock again, helping them understand how many days it takes on average to sell their tomato inventory.
A high ratio means the retailer is selling these fresh items quickly and not holding onto them for a long period, while a lower ITR is an indication that these items are sitting on the shelves too long, which could lead to wasted inventory and additional costs. Understanding ITR results in better purchasing decisions, enhanced promotion effectiveness, and improved overall inventory management.
To calculate the Inventory Turnover Ratio, you just need to apply a simple formula, by dividing the Cost of Goods Sold (COGS) by the Average Inventory as follows:
| Inventory Turnover Ratio = | Cost of Goods Sold (COGS) _______________________ Average Inventory |
Cost of Goods Sold (COGS): The direct cost of the goods you sell during a specific period (materials, labor, etc).
Average Inventory: The average value of your inventory throughout that period.
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