Investors use the information contained in annual reports published by companies to calculate various ratios, including the inventory turnover ratio, to get a better idea of how well the company is doing. The inventory turnover ratio measures how many times each year the company goes through it's inventory. A company's annual report contains its balance statements, which show the various assets, such as inventory. It also contains an income statement, which shows how much money the company made during the year.
Step 1
Look up the company's sales net sales in the income statement and the starting and ending values of inventory for the company in the balance sheet.
Step 2
Calculate the average inventory for the company. Add the starting inventory and ending inventory and divide the result by 2. For example, if the company started the year with $1 million in inventory and ended with $1.2 million in inventory, the company has an average inventory of $1.1 million.
Step 3
Divide the company's sales by the average inventory to calculate the inventory turnover ratio. In this example, if the company has $5.5 million in sales, divide $5.5 million by $1.1 million to find the company turns over its inventory five times per year.
