Turn ratio is an accounting term used to describe the financial operations of a business. Specifically, it expresses the amount of time it takes for a company to use up its inventory. Knowing how to calculate turn ratio is useful because it will allow you to compare the turnover rate of a company's goods to that of its competitors. It will also allow you to make more informed investing decisions regarding the company.
Determine the cost of goods sold. Cost of goods sold is a term used to describe the price paid by a business for all of the goods that it has sold for the year. The cost of goods sold can be found on the company's income statement. If you do not have the income statement readily available, you can calculate cost of goods yourself. To do this, subtract the value of the ending inventory from the value of the goods available for sale. The difference will be the cost of goods sold for the year. For example, if you had a company with an ending inventory worth $5,000 and at the beginning of the year the company had $10,000 worth of goods for sale, you would subtract $5,000 from $10,000 to get a cost of goods sold of $5,000.
Calculate the average inventory for the year. To do this, add the inventory value for the current year to the inventory value for the previous year and then divide this number by two. The quotient will be the average inventory for the year. For example, if you had a company with an inventory value of $50,000 at the beginning of 2010 and an inventory value of $60,000 at the beginning of 2009, you would add these together to get $110,000. Then divide $110,000 by 2 to get an average inventory of $55,000.
Divide the cost of goods sold by the average inventory for the year. The result will be the turn ratio. For example, if you had a company whose cost of goods sold was $100,000 and whose average inventory was $50,000, you would divide 100,000 by 50,000 to get a turn rate of 2 cycles per year.
Turn ratio can also be referred to as inventory turnover rate or turnover ratio.
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