Intuitively, inventory turnover in the number of times per year that the entire inventory is replaced. Thus, 365 divided by inventory turnover equals the average number of days that raw materials, goods in process, and products stay in inventory (using a weighted average).

To calculate inventory turnover at the end of a year, divide the annual cost of goods sold by the average inventory over the year (the average inventory over the year is the average of the inventory values on the balance sheet at the end of the current year and the previous year).

A “good value” is highly dependent on the industry. Thus, for example, a fresh seafood retail business would expect an inventory turnover of around 365, while an art dealer would expect an inventory turnover of around 2.

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