Stock turnover is a measure of operational efficiency. Specifically, it tells the analyst how many times stock or inventory is being sold and purchased over a given time period. It is calculated in several different ways, however, one of the most common ways is to divide sales by inventory. In general, the higher the turnover, the better the company is doing with inventory management as there is a cost to holding inventory.
- Skill level:
Determine the sales for the company. This is usually the first line item on the Net Income Statement which can be found on the company's website or within the Annual Report which can be requested by contacting the company. Let's say sales for the last year were £65,000.
Determine inventory. Inventory is a line item on the Balance Sheet which is also located in the Annual Report. Let's say inventory was valued at £32,500 last year.
Calculate stock turns. The formula is sales divided by inventory or £65,000 / £32,500 = 2. Usually an "x" is used to denote "times" in the answer. So the answer here is 2x (read: inventory turned two times in the past year).
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