Stock Turnover Ratio Formula

Stock Turnover Ratio Formula (Table of Contents)

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What is the Stock Turnover Ratio Formula?

The term “stock turnover ratio” refers to the performance ratio that helps in determining how good is a company in managing its stock inventory while generating sales during a given time period. In other words, the ratio indicates how many times during a specific period of time (usually a year) a company is able to sell its inventory. The formula for a stock turnover ratio can be derived by dividing the cost of goods sold incurred by the company during a given period of time by the average inventory held during the same period. Mathematically, it is represented as,

Examples of Stock Turnover Ratio Formula (With Excel Template)

Let’s take an example to understand the calculation of the Stock Turnover Ratio Formula in a better manner.

Stock Turnover Ratio Formula – Example #1

Let us take the example of a company in order to demonstrate the concept of the stock turnover ratio. During 2018, the company incurred the cost of the raw material of $150 million, the direct labor cost of $120 million and the manufacturing overhead cost of $30 million. The inventory holding at the beginning of the year and at the end of the year stood at $300 million and $320 million respectively. Calculate the stock turnover ratio of the company based on the given information.

Solution:

Cost of Goods Sold is calculated using the formula given below

Cost of Goods Sold = Cost of Raw Material + Direct Labor Cost + Manufacturing Overhead Cost

• Cost of Goods Sold = $150 million + $120 million + $30 million
• Cost of Goods Sold = $300 million

Average Inventory is calculated using the formula given below

Average Inventory = (Inventory at Beginning of the Year + Inventory at End of the Year) / 2

• Average Inventory = ($300 million + $320 million) / 2
• Average Inventory = $310 million

Stock Turnover Ratio is calculated using the formula given below

Stock Turnover Ratio = Cost of Goods Sold / Average Inventory

• Stock Turnover Ratio = $300 million / $310 million
• Stock Turnover Ratio = 0.968

Therefore, the stock turnover ratio of the company for 2018 stood at 0.968 times.

Stock Turnover Ratio Formula – Example #2

Let us take the example of Walmart Inc.’s annual report for the year. As per the annual report, the following information is available:

Average Inventory is calculated using the formula given below

Average Inventory = (Inventory at Beginning of the Year + Inventory at End of the Year) / 2

• Average Inventory = ($43.05 billion + $43.78 billion) / 2
• Average Inventory = $43.41 billion

Stock Turnover Ratio is calculated using the formula given below

Stock Turnover Ratio = Cost of Goods Sold / Average Inventory

• Stock Turnover Ratio = $373.40 billion / $43.41 billion
• Stock Turnover Ratio = 8.60

Therefore, Walmart Inc.’s stock turnover ratio for the year 2018 stood at 8.60 times.

Source Link: Wlmark Inc. Balance sheet

Stock Turnover Ratio Formula – Example #3

Let us now take the example of Apple Inc.’s annual report for the year 2018. As per the annual report, the following information is available.

Solution:

Average Inventory is calculated using the formula given below

Average Inventory = (Inventory at Beginning of the Year + Inventory at End of the Year) / 2

• Average Inventory = ($4.86 billion + $3.96 billion) / 2
• Average Inventory = $4.41 billion

Stock Turnover Ratio is calculated using the formula given below

Stock Turnover Ratio = Cost of Goods Sold / Average Inventory

• Stock Turnover Ratio = $163.76 billion / $4.41 billion
• Stock Turnover Ratio = 37.17

Therefore, Apple Inc.’s stock turnover ratio for the year 2018 stood at 37.17 times.

Source: Apple Inc Balance sheet

Explanation

The formula for a stock turnover ratio can be derived by using the following steps:

Step 1: Firstly, determine the cost of goods sold incurred by the company during the period. It is the sum of all the direct and indirect costs that can be apportioned to the job order or product. It primarily includes direct labor costs and cost of raw material along with manufacturing overhead costs. The cost of goods sold is also known as the cost of sales.

Cost of Goods Sold = Direct Labor Cost + Cost of Raw Material + Manufacturing Overhead Cost

Step 2: Next, determine the inventory holding of the company at the beginning of the period and at the end of the period. Then the average inventory is calculated by computing the mean of the inventory at the beginning of the period and at the end of the period.

Average Inventory = (Inventory at the Beginning of the Period + Inventory at the End of the Period) / 2

Step 3: Finally, the formula for a stock turnover ratio can be derived by dividing the cost of goods sold incurred by the company during the period (step 1) by the average inventory held across the period (step 2) as shown below.

Stock Turnover Ratio = Cost of Goods Sold / Average Inventory

Relevance and Uses of Stock Turnover Ratio Formula

It is important to understand the concept of stock turnover ratio as it assesses the efficiency of a company in managing its merchandise. A higher value of stock turnover ratio indicates that the company is able to sell the stock inventory relatively quickly, while a lower value means that the company holds the higher value of inventory at any point in time. It is advisable to compare the stock turnover ratio for companies in the same industry and preferably of comparable sizes to draw meaningful insights.

Stock Turnover Ratio Formula Calculator

You can use the following Stock Turnover Ratio Calculator

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