The pace at which inventory stock is sold, or utilized, and replaced is known as inventory turnover. Cost
of products divided by average inventory is used to compute the inventory turnover ratio. In general, a
greater sales-to-cost ratio indicates better sales; on the other hand, a lower ratio indicates poorer sales.
Inventory turnover may be calculated in two ways, one based on cost of goods sold (COGS) and the
other on sales, as shown above. Analysts divide COGS by average inventory rather than sales since sales
contain a markup over cost. This provides more accuracy in the inventory turnover calculation. Inflating
inventory turnover by dividing sales by average inventory is a common practice. Using the average
inventory in both cases helps reduce seasonality.