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Home » Investment Banking Tutorials » Financial Statement Analysis » Stock Turnover Ratio Formula

Stock Turnover Ratio Formula

Formula to Calculate Stock Turnover Ratio

Stock Turnover Ratio can be defined as the frequencies with which the organization sells and then replaces its inventories during a given time. The formula for calculating Stock Turnover Ratio is represented as follows,

Stock Turnover Ratio Formula = Cost of Goods Sold /Average Inventory

Stock Turnover Ratio Formula

Where,

  • The cost of goods sold equals Opening stock + Purchases Less Closing Stock.
  • The cost of goods sold can be replaced by the cost of sales as well.
  • Average inventory is the mean of opening stock and closing stock. In case opening stock detail is not available, we can take closing stock as well.

Explanation

It can be calculated using the below steps:

The average stock needs to be computed as firms might carry lower or higher stock levels at a certain period during the year. E.g., Retailers such as Best Buy Co. Inc. might carry higher stock, which leads till the holidays in Quarter four and lower stock levels in Quarter one post those holidays.

For a company, the cost of goods sold (i.e., COGS) is a yardstick for the production costs of services and goods. The cost of goods sold shall include the cost of labor costs, which are directly related to stock produced, materials, and any other fixed costs or factory overhead, which are directly used for producing those goods.

Dividing COGS by average stock shall yield a stock turnover ratio.

Calculation Examples of Stock Turnover Ratio

Let’s see some simple to advanced practical examples to understand it better.

You can download this Stock Turnover Ratio Formula Excel Template here – Stock Turnover Ratio Formula Excel Template

Example #1

Suppose Company C had an average inventory during the year $1,145,678, and the cost of goods sold during the same period was $10,111,987. You have required to calculate the stock turnover ratio.

Solution

Use the following data for calculation of the stock turnover ratio

  • Cost of Goods Sold: 10111987.00
  • Average Inventory: 1145678.00

Example 1.1png

  • =  10,111,987 /1,145,678

Example 1.2png

  •  = 8.83 times

It means the stock rotates for 8 times.

Example #2

Sicco is a brand name for toothpaste in the country I. Company has taken a cash credit loan from Bank of Picco. The company is required to submit monthly stock and debtors’ details with aging on the same. Also, the company is required to submit a certain ratio, which includes the stock turnover ratio as well. The details from the company’s profit and loss statement are per below-

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Stock Turnover Ratio Formula Example 2

Based on the above details, you are required to calculate the Inventory Turnover Ratio.

Solution

In this example, we are given a profit and loss statement, and we need to figure out the cost of goods sold and average inventory as well.

Calculation of  Cost of Goods Sold

Stock Turnover Ratio Formula Example 2.1png

Cost of Goods Sold=Opening Stock + Net Purchases – Closing Stock

= 3,500,000 + ( 21,350,000 – 320,250 ) – 4,200,000

  • Cost of Goods Sold = 20,329,750

Calculation of Average Stock

Stock Turnover Ratio Formula Example 2.2png

Average Stock = ( Opening Stock + Closing Stock ) / 2

=  ( 3,500,000 + 4,200,000 ) / 2

  • Average Stock  = 3,850,000

Calculation of stock turnover ratio can be done as follows,

Stock Turnover Ratio Formula Example 2.3png

  • =20329750.00/3850000.00

Stock Turnover Ratio will be –

Stock Turnover Ratio Formula Example 2.4png

  • = 5.28 times

 It means the stock rotates for 5.28 times.

Example #3

Company X is trying to evaluate 3 products that its currently selling in the market. It wants to analyze which one of the products is slow-moving and which one is the fast-moving good. On reviewing the detail of the three products, below is the summary created by the finance department.

Particulars Product 1 Product 2 Product 3
Average Revenue Earned 42000000.00 56000000.00 49000000.00
Gross Profit Margin 25.00% 20.00% 22.00%
Closing Stock 5250000.00 5000000.00 6625000.00

Based on the above information, you are required to advise the management which goods are fast-moving and which is slow-moving?

Solution

In this example, we are given Average Revenue and closing stock. Since there is no opening stock information provided, we can take closing stock as a proxy for our computation purposes. Further, we are also not given purchases, and hence we cannot calculate the cost of goods sold with that formula. Still, instead, we are given a Gross profit margin, so if we deduct the gross profit margin from revenue, we will get the cost of sales, which we shall we use in the below formula.

Stock Turnover Ratio formula = Cost of goods sold or cost of sales /Average Inventory or Closing stock

Cost of Sales Margin For Product 1

Stock Turnover Ratio Formula Example 3.1png

=1-25.00%

  • Cost of Sales Margin = 75.00%

Similarly, we can calculate the cost of sales margin for product 2 and 3

Example 3.5png

Cost of Sales

Stock Turnover Ratio Formula Example 3.2png

  • =42000000.00*75.00%
  • Cost of Sales = 31500000.00

Likewise, we can calculate the cost of sales for product 2 and 3

Stock Turnover Ratio Formula Example 3.6png

Calculation of stock turnover ratio can be done as follows,

Example 3.3png

=31500000.00/5250000.00

Example 3.4png

  •  = 6.00

Similarly, we can calculate the stock turnover ratio for product 2 and 3

Example 3.7png

Using this ratio, it appears that product 2 is fast-moving as it has the highest turnover ratio and product 3 is comparatively slow-moving goods, which is 5.77 verses 6 for product 1. Further, the gross profit margin of product 1 is better than product 3; henceforth, it is a wise decision to chose to shut down product 3 if at all, the company is taking such a decision.

Calculator

You can use these stock turnover ratio formula, calculator.

Cost of Goods Sold
Average Inventory
Stock Turnover Ratio Formula
 

Stock Turnover Ratio Formula =
Cost of Goods Sold
=
Average Inventory
0
= 0
0

Relevance and Uses

Commonly, the stock turnover ratio is used almost everywhere, whether making business decisions, or while borrowing a loan, or while valuing a firm or when comparing goods, etc. The higher the ratio, the better it is, and it means the company sells that product very quickly, and demand also exists for that product. When the turnover is low, it would mean outdated inventory or slow-moving goods. Higher turnover would also mean that the company is missing sales opportunities as it’s not carrying adequate stock.

Recommended Articles

This article has been a guide to Stock Turnover Ratio Formula. Here we discuss how to calculate the stock turnover ratio along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Turnover Ratios Formula
  • Examples of Profit and Loss Statement 
  • Activity Ratios
  • Inventory Turnover Ratio Calculation
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