What is Stock Turnover Ratio STR? A Detailed Guide to Stock Turnover Ratio

The higher the stock turnover ratio, the better it is, and it means the company sells that product very quickly, and demand also exists for that product. A higher ratio may also mean that the company is missing sales opportunities as it’s not carrying adequate stock. It can also put the business in difficulty if prices from the suppliers’ end rise.

Stock Turnover Ratio Calculation Example

A company can then divide the days in the period, typically a fiscal year, by the inventory turnover ratio to calculate how many days it takes, on average, to sell its inventory. The calculation of the stock turnover ratio consists of dividing the cost of goods sold (COGS) incurred by the average inventory balance for the corresponding period. The stock turnover ratio (STR) is a financial metric that measures how often a company’s inventory is sold and replaced over a specific period. Two different approaches to calculating the stock turnover ratio exist, each focusing on different aspects of inventory management. Yes, while a high stock turnover ratio typically indicates efficiency, it can also suggest that a company’s inventory is too low, potentially leading to stockouts and lost sales.

Dividing the 365 days in the year by 8.8 shows that Walmart turned over its inventory about every 41 days on average. Although this will increase the number of shares outstanding, a stock split will divide the company’s stock price and make it more accessible for new investors to buy full shares. Should a company improve its bottom line and begin performing tremendously well, more investors will demand the stock, driving up the number of shares people trade and increasing the share turnover. Share turnover is calculated by dividing the average number of shares traded over a given period by the average number of total outstanding shares for that same period.

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1. While it is still a useful measurement, share turnover does have its limitations.
2. Shares of companies impacted would likely fall as investors would seek to sell their shares.
3. For example, retail inventories fell sharply in the first year of the COVID-19 pandemic, leaving the industry scrambling to meet demand during the ensuing recovery.
4. The build-up of excess inventory tends to be perceived negatively, as it often stems from overstocking and a poor understanding of customer spending behavior.
5. This ratio helps improve inventory management by informing business about the speedy or sluggish flow of inventory being utilized to create sales.
6. This can prompt the company to reassess, offer discounts or promotions, or adjust procurement decisions to prevent overstocking.

The ratio reflects the proportion of stocks that have changed in one year. Share turnover should not be confused with the turnover rate of a mutual fund or an exchange traded fund (ETF), which measures how actively managed the portfolio is. In closing, the stock turnover ratio of our hypothetical company was 1.5x, 1.9x, and 2.5x from 2020 to 2022. Because features of goodwill an income statement line item is being compared to a balance sheet item, there is a mismatch created between the time period covered by the numerator and denominator.

Suppose Company C had an average inventory of $1,145,678, and the cost of goods sold during the same period was $10,111,987. The stock turnover ratio allows businesses to check how frequently they are turning their purchased stock or inventory convert into sales. When the figure obtained in this case is high, it reflects the business is proceeding in the right direction. freelance accounting jobs employment However, the lower ratio warns them to be more specific with the sales strategies they apply and implement.

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An overabundance of cashmere sweaters, for instance, may lead to unsold inventory and lost profits, especially as seasons change and retailers restock accordingly. Another aspect of share turnover is defining an investor’s desired goal for liquidity. During economic downturns where it is easier to trade on emotions, investors may want stock that is harder to buy or sell. These types of illiquid assets may help preserve its value during volatility as they can’t be bought or sold as quickly.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. Similarly, the consumption rate of material X is greater compared to material Z, which is the lowest (as indicated by the number of days calculated). Stock turn ratio can help you investigate your investment in spare parts and spot operational inefficiencies in purchasing, tracking, and using inventory. For example, a stock turn ratio of 0.5 is low, yet typical, and indicates an overstocked plant, especially if stock outs are also low. Launching targeted promotions to clear excess stock can boost sales and free up storage space.

The inventory turnover rate is a key indicator for inventory management and overall business performance. Regular analysis of this indicator makes it possible to fine-tune supplies, and avoid costly overstocking or, worse still, stock-outs. A clear understanding of this rate helps to identify high and low turnover products, which facilitates strategic decisions such as promotions or deletion of item references. Some retailers may employ open-to-buy purchase budgeting or inventory management software to ensure that they’re stocking enough to maximize sales without wasting capital or taking unnecessary risks. The inventory-to-saIes ratio is the inverse of the inventory turnover ratio, with the additional distinction that it compares inventories with net sales rather than the cost of sales. A higher inventory-to-sales ratio suggests that the company may be holding excess inventory relative to its sales volume, meaning there may be inefficiencies in its inventory management.

Analyzing an inventory turnover ratio in conjunction with industry benchmarks and historical trends can provide valuable insights into a company’s operational efficiency and competitiveness. However, tracking it over time or comparing it against a similar company’s ratio can be very useful. As mentioned, the inventory turnover ratio measures the number of times a company’s inventory is sold and replaced over a certain period. A higher inventory ratio is usually better, although there may also be downsides to a high turnover.

Tech has a high turnover ratio because its employees are in high demand elsewhere. The retail and hospitality industries have high turnover ratios because their jobs are ill-paid and tough to do. Fidelity’s Rydex S&P Small-Cap 600 Pure Growth Fund (RYSGX) invests in the common stock of companies within the capitalization range of the underlying S&P Small-Cap 600 Index and derivative instruments. At least 80% of the fund’s net assets are invested in fast-growing companies or firms in up-and-coming industries, and it seeks to match the index’s performance on a daily basis.