Turnover Ratio

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Definition: Turnover Ratio

Turnover ratio is most commonly used in 2 different contexts.

A) In the context of inventory of goods of a company:

The ratio is a measure of the efficiency, reflecting how effectively the company is able to manage its inventory. It does so by comparing the cost of goods sold with the average inventory for the period in question.

The ratio essentially measures the number of times average inventory is sold during a period.


For example, a company X with $5000 of average inventory and sales of $50,000 has sold its inventory 10 times in the given period.


Inventory turnover ratio= Cost of goods sold/Average Inventory

The ratio is dependent on 2 components: i) Average Inventory ii) Cost of goods


Average inventory is given in the balance sheet of the company

Cost of goods is given in the income statement of the company



B) In the context of mutual funds:

In this context, it refers to the percentage of a fund's assets which have changed over the course of a given time period. This time period generally is a year. It is calculated by dividing the average assets during the period by the lesser of the value of purchases and the value of sales during the same period. Mutual funds with higher turnover ratios generally have higher expenses.


Hence, this concludes the definition of Turnover Ratio along with its overview.


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