Inventory Turnover and Days of Inventory on Hand (DOH)

Inventory turnover is an important activity ratio.

Activity ratios measure how effectively a business uses its resources, such as receivables collection, inventory, etc. They are also called efficiency ratios.

Inventory turnover ratio provides a measure of how effectively a business is using its inventory.

These ratios measure how many times the company's inventory has been turned over or sold during a specified period.

For example, an inventory turnover ratio of 10 means that the inventory has been turned over 10 times in the specified period, usually a year. The Days of Inventory at Hand (DOH) specifies how many days worth of inventory the company had in hand. For example, DOH of 36 days means that the company had 36 days of inventory at hand during the period.

Formulas

$Inventory\ Turnover = \frac{Cost\ of\ Goods\ Sold\ (COGS)}{Average\ Inventory}$