# 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

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

Cost of Goods Sold value is taken from the Income Statement and Inventory is taken from the Balance Sheet. Since the balance sheet tells the financial condition of a company at the end of the period, we take Average Inventory for the year in our calculation.

$DOH = \frac{365\ or\ 360}{Inventory\ Turnover}$

365 is the most commonly used day count convention however some analysts may prefer to use 360 days.

# Checkout our eBooks and Templates

eBooks and templates related to finance, R programming, Python, and Excel.
Visit Store
Get our Data Science for Finance Bundle for just $29$51. That's 43% OFF.
Get it for $51$29