 In this session, we are going to learn how the inventory turnover ratio can be calculated and once it is calculated how we are going to interpret the values of inventory turnover ratio what it tells about the overall efficiency of a company for which it has been calculated. So companies calculate inventory turnover by considering the average inventory value which you want to take the value at the beginning of the time period, what is the value of the inventory and the ending of the time period, whether it is a year or six months, what is the value of the inventory at the end of the time period you will calculate the average of both the values and then you will take the value of sales or the value of the cost of goods sold For example, we have seen the formula and for example, the cost of goods sold for a company in a certain year was $110 and at the beginning time period, it had an inventory of $150 and at the end of the same time period, the inventory was $480 The value of the average you have calculated, you have divided $110 from the value of the average so you have the value of 0.7 times So what is this telling us, to understand this, I have taken another real life example to tell you how we interpret the value of the inventory turnover ratio So for example, in January 2018, there is this Walmart, a big grocery store which has a lot of branches They reported their annual sales in January 2018 Their total sales annual value is $500.34 billion and they reported the year end inventory of $43.78 billion and the value of the cost of goods sold, they reported $373.40 billion So for Walmart, for Walmart stores, the value of the inventory turnover ratio is calculated for the year 2018 So it would be 373.40 divided by 43.78 Now I have told you how to calculate the average and this gives you the value of $8.53 So you have divided $8.53 from the value of $1 and there are 365 days in a year which is multiplied in front of that So you will get the value of $42 So this is telling you that the days sales of inventory or days inventory that has been calculated for this example as $42 days So just now I had told you how we interpret the days inventory It is basically the gap between inventory and how long the inventory takes the shape of sales So this means that on average, in 2018, in Walmart stores some inventory was completely picked in 42 days on average So this is how we can interpret the value And as much as your capital intensive or such an industry where there are no immediate sales like we saw in the grocery store that whatever they have kept in stock their cycle of inventory and sales that is relatively shorter as compared to if we are talking about machinery or equipment or talking about the sales of machines then there will be more gap in inventory and sales So here since the grocery store was here you can see the value here of $42 days This means that all the inventory within 42 days is sold So this is how we use the inventory turnover ratio and the concept of days inventory to understand how quickly the inventory is converted in terms of its sales And that also indicates how efficient a company is