Inventories are used in your selling activities, in production and whatnot. However, have you measured they’re turnover, namely how many times they’re sold and replaced over a period?

There are two methods reaching the ratio: (1) either you divide sales revenue with inventory balance or (2) you divide cost of goods sold with average inventory. Note that the result gives you the time the balance is “going through your profit and loss accounts”. To come back to the formulas, whilst the first one seems to be most popular, note that the second option is more accurate since inventory is recognized at its cost into cost of goods sold whereas sales revenue is made in selling prices including profit margins on top of the cost. 

Provided you’re also interested in how many days it takes for the inventory to be sold or and replaced, you should divide it by the number of days within a reporting period, i.e. month. Dividing the result with say 30 gives you the result showing how many months it takes for the balance to be sold and replaced.

Reading the ratio means you must not only compare the figure, but also consider if the industries of the entities being compared are in fact comparable. Different industries have different optimal stock levels and inventory turnovers.

When comparing your company’s ratio against industry average note that if the ratio is low, it’s usually a bad sign (unless you bought a considerable stock balance for a one-off deal for an example). Also consider seasonality. For such a purpose there’s the possibility to use average inventory instead if the balance fluctuates over periods for a justified reason.