Method and assumptions
Use inventory measured at cost when COGS is the numerator. Mixing retail-value inventory with cost-of-goods sold produces an inconsistent turnover ratio.
Average inventory = (beginning + ending inventory) / 2. Turnover = COGS / average inventory. GMROI = gross profit / average inventory.
Common questions
Should inventory be measured at retail price?
Not when using COGS. Use cost-basis inventory for a consistent ratio.
Can a very high turnover be harmful?
Very high turnover can indicate understocking and lost sales, so review service level and stockouts as well.
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