How the calculation works
Take cost of goods sold for the period from your income statement and divide it by average inventory from your balance sheet. Average inventory is commonly the opening balance plus the closing balance, divided by two. Using cost rather than sales keeps both sides of the ratio at cost, so a change in your selling prices does not distort it.
To express the result in days, divide 365 by the turnover figure. This is often called days sales in inventory. It shows roughly how long your stock would last at the current rate of selling.
A worked example
For illustration, a shop has cost of goods sold of $240,000 for the year. It started the year with $50,000 of inventory and finished with $70,000, so average inventory is $60,000. Inventory turnover is $240,000 divided by $60,000, or 4.0. Dividing 365 by 4.0 gives about 91 days of stock on hand.
Whether 91 days is healthy depends on what the shop sells. A business selling perishable goods would find it far too slow, while one selling made-to-order furniture parts may find it ordinary. The figures are round and illustrative only.
Reading the result with care
BDC notes that a higher turnover generally points to better liquidity, because stock is converting to sales more quickly. A very high figure is not automatically good news, though. It can also mean shelves are often empty and sales are being missed.
A low figure may reflect slow-moving or outdated stock, over-buying, or a deliberate build-up before a busy season. Compare the ratio with your own earlier periods and with similar businesses rather than a single target. Remember too that the result depends on how closing inventory was counted and valued, so errors in a stock count flow straight into the ratio.
What to discuss with your accountant
Ask which inventory valuation method your statements use, whether a year-end count is planned, and whether any stock should be written down. Bring purchase invoices, count sheets and your sales by product line.
Ask also whether average inventory should use year-end figures only or several points in the year, which matters if your business is seasonal. Treat the ratio as a prompt for questions, alongside your cash forecast, not a verdict on its own.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.