The different mathematical formulas for calculating stock turns
Calculating the inventory turnover ratio
To obtain an inventory turnover ratio, first calculate the value of average inventory over a defined period, usually a calendar or accounting year. The average stock corresponds to the sum of the value of the initial stock and the value of the final stock, divided by two. Average stock can be calculated in terms of value or quantity
Average stock = (initial stock + final stock)/2
For a final stock of 150,000 euros and an initial stock of 155,000 euros, the average stock value is 152,500 euros ([150,000 + 155,000]/2 = 152,500)
From this figure, it's easy to calculate a company's inventory turnover ratio. It is obtained by dividing sales by average inventory
Inventory turnover ratio = Sales/(average stock/gross margin)
For annual sales of 762,500 euros and a gross margin of 75%, the inventory turnover ratio would therefore be 3.75 (762,500/(152,500/0.75)) = 3.75). This figure means that the company studied sold out its entire inventory 3.75 times over the course of the year.
Calculating lead times
In practice, the notion of stock clearance time is a variable very close to the turnover ratio. As its name clearly indicates, it provides information on the length of time a product remains in stock before finding a buyer
The inventory turnover time is obtained by a simple calculation, which consists of dividing the average inventory value by sales, then multiplying the result by 365.
Stock clearance time = (average stock/sales) *365
Using the same example as above, the inventory turnover time for the company in question would therefore be 73 ([152500/762500]*365 = 73).
In this particular case, the average duration of goods in stock will therefore be 73 days, which is a relatively high value.
