A ratio that measures company's ability to sell and replace its inventory. High ratio indicates that company is able to sell its inventory in the short period. Declining ratio indicates inventory build up.

There are two ways to calculate Inventory Turnover Ratio

Inventory Turnover Ratio Formula = (Sales / Inventory)

Inventory Turnover Ratio Formula = (Cost of Goods Sold / Inventory)

The benefit of using the second method is to eliminate gross profit from consideration