How to Calculate the Inventory-to-Sales Ratio
The inventory-to-sales ratio equals inventories divided by monthly sales, so it reports how many months of selling the stock on hand would cover.
The Inventory-to-Sales formula
Calculator
Enter inventories, monthly sales and the target ratio to get months of cover, days of cover and stock above target.
Finished goods, work in progress and materials on hand at the end of the period.
One month of sales. Divide a quarterly figure by three if that is all you have.
The months of cover the firm aims to hold, used to price the gap.
The stock on hand covers 1.3 months of selling at the current pace.
- Days of sales covered
- 39
- Inventory at the target ratio
- $660,000
- Inventory above target
- $120,000
- Reading
- Stock above target
The same answer stated in days is 39, counting a month as 30 days.
Holding the target months of cover would mean carrying $660,000 of stock.
Actual stock differs from target by $120,000, and that gap is what orders have to work off.
Unplanned stock builds up when sales fall short of what was produced, so firms cut orders and output follows.
How to calculate Inventory-to-Sales, step by step
- 1Value the inventory. Add finished goods, work in progress, and materials held at the end of the period, priced the same way sales are.
- 2Take one month of sales. Use sales over a single month. Quarterly sales divided by three works when only the quarter is published.
- 3Divide. Inventories divided by monthly sales gives the ratio, and the unit of the answer is months of sales.
- 4Convert to days if it helps. Multiplying the ratio by 30 states the same answer as days of selling the stock would cover.
- 5Compare with the target. Set the ratio against the level the firm aims to hold, since the gap is what triggers a cut in orders or an extra production run.
Worked example: Inventory-to-Sales
A wholesaler holds $780,000 of inventory and sells $600,000 a month, so the ratio = 780,000 ÷ 600,000 = 1.3 months of sales, or 1.3 × 30 = 39 days of cover. If the target is 1.1 months, target inventory = 1.1 × 600,000 = $660,000, which leaves $120,000 of stock above target. Clearing it means selling faster or ordering less, and the second is what shows up as a fall in production.
Inventory-to-Sales questions
What does a rising ratio mean?
Goods are piling up faster than they sell. Firms respond by cutting orders, which pulls production down before the weakness shows in any sales figure, so the ratio tends to lead the cycle.
Why do economists watch inventories at all?
Inventory swings are a small share of output but a large share of its change, because firms adjust production to correct a stock imbalance well before final demand recovers.
Is a low ratio always better?
No. A thin stock cuts storage costs but leaves nothing to sell when demand jumps or a shipment runs late, so the useful reading is the gap from target rather than the level itself.
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