![]() Using this method, we would estimate that The Home Depot turns its inventory about once every 48 days. If we wanted to know home many days it takes The Home Depot to turn its inventory once, we could divide the number of days in the year by the inventory turnover ratio we just calculated. Home Depot turns over its inventory about 7.6 times each year. Using this method we could calculate Home Depot’s inventory turnover ratio as 7.6. We can calculate inventory turnover for a single public company (such as The Home Depot) and estimate the average turnover for an entire industry. ![]() Sales ÷ Ending Inventoryįor example, for the fiscal year ended January 31, 2020, The Home Depot reported total revenue of $110.2 billion, a cost of revenue (roughly the cost of goods sold) of $72.7 billion, and an inventory balance of $14.5 billion (which I will use as a stand-in for both ending inventory and average inventory), according to Yahoo! Finance. Many investors use a company’s sales and its ending inventory to calculate its inventory turnover ratio. The method you choose depends on which provides a better view of your company’s inventory and sales performance. The calculations produce different results. There are at least a couple of ways to calculate an inventory turnover ratio: (i) total sales divided by ending inventory or (ii) cost of goods sold divided by average inventory. Thus, inventory turnover - and the related inventory turnover ratio - is a powerful key performance indicator. The company with 10 inventory turns should experience better cash flow and more sales. But one company turns its inventory 10 times each year and the other only five times. Both companies hold about $1 million in inventory on average. Imagine two online retailers selling products for home gardeners. has enough inventory to supply 147 days worth of sales.How quickly a business sells its inventory is typically a strong indicator of efficiency, cash flow, and general well-being. Using the inventory turnover figure above, ABC Co.’s number of days sales in inventory would be: Number of days sales in inventory = Number of days per year / Inventory turnover Inventory turnover can also be used to calculate the number of days sales in inventory, which shows how many days a company’s inventory will meet its sales, on average: might want to generate more sales or reduce the amount of inventory it carries. ![]() This means it has turned over its inventory 2.5 times during the year. has an annual COGS of $140,000 and an average inventory value of $55,000, so its inventory turnover would be: Inventory turnover = cost of goods sold (COGS) / average inventoryĪ higher inventory turnover number indicates that a company’s inventory has good liquidity. Inventory turnover is calculated as follows: It is one of six main calculations used to determine short-term liquidity-the ability of a company to pay its bills if they all came due immediately. Inventory turnover shows how many times per year a company converts its inventory into sales. Growth & Transition Capital financing solutions Kauffman Fellows Program Partial Scholarship Venture Capital Catalyst Initiative (VCCI) Industrial, Clean and Energy Technology (ICE) Venture Fund
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