Isn’t it a wonderful feeling when the stock you buy for a month gets sold within the same period?
This means you have just enough inventory to avoid stockouts, but not too much to rack up holding costs. This indicates a healthy stock to sales ratio, which is one of the hallmarks of a lean supply chain.
While increasing order volumes, market fluctuations, and supply chain disruptions can make it difficult to achieve a good stock-to-sales ratio, growing ecommerce businesses should nevertheless endeavor to track and improve it.
In this article, we’ll discuss what the stock to sales ratio is, how to calculate it, and how ShipBob can help you track and optimize this ratio as well as other supply chain KPIs.
What is stock to sales ratio?
Stock to sales ratio, also known as inventory to sales ratio or I/S ratio, measures the value of your inventory against the value of sales for a certain period of time.
This inventory management KPI helps retailers understand at what pace they are liquidating stock, and how much of their capital they have invested in inventory on average.
Low inventory to sales ratios are typically better — but your goal should be to achieve a stock to sales ratio that is healthy for your business, rather than the lowest possible one. Ideally, it’s best to keep this ratio between 0.167 and 0.25.
Why is knowing stock to sales ratio important?
Inventory levels are a delicate balance. You don’t want to have too much of your capital invested in inventory (as you need to be flexible to meet ever-changing demand and avoid deadstock), but you also don’t want to stock out too soon.
Your stock to sales ratio can help you understand how much capital you have tied up in inventory on average over a specific period of time, and how that compares to your revenue from sales.
By tracking it consistently (ideally for 3 to 5 years), you gain new insights that you can use to optimize your stock levels, adjust your sales model, and subsequently maximize your bottom line.
For instance, if your stock to sales ratio is lower than you’d like, you can infer that you are stocking out and aren’t holding enough inventory to consistently meet customer demand. To increase it, you should buy more inventory (provided the company’s sales volumes don’t change), and improve demand forecasting in future seasons.
On the other hand, if your ratio is too high, you can conclude that you’ve likely overstocked and are incurring too much storage and holding cost (which chips away at the profit margin). In this case, you must either reduce stock (provided the sales volumes remain constant) or drive sales while keeping the inventory value constant.
“We have a Shopify store but do not use Shopify to track inventory. In terms of tracking inventory, we use ShipBob for everything — to be able to track each bottle of perfume, what we have left, and what we’ve shipped, while getting a lot more information on each order.
The analytics are super helpful. We download Excel files from the ShipBob dashboard all the time and use them to analyze everything from cancellations, to examining order weights, to checking on whether ShipBob is shipping orders on time. Even the way their warehouse receiving orders (WROs) work for sending inventory is very straightforward.”
Ines Guien, Vice President of Operations at Dossier
How to calculate stock to sales ratio
The stock to sales ratio can be calculated by dividing the average inventory value in a certain period of time by the net sales achieved in that same period of time.
Stock to sales ratio = Average stock value / Net sales value
This can be turned into a percentage by multiplying it by 100.
To calculate average stock value, simply add your beginning inventory value and ending inventory value together, and then divide that sum by 2.
Average stock value = (Beginning inventory + Ending inventory) / 2
To calculate net sales, simply find your gross sales valuation (total sales before discounts and returns) and subtract from it the value of all returned sales.
Net sales = Gross sales – Sales returns
All the figures needed to calculate stock to sales ratio can be found in the company’s income statement, balance sheet, and other financial statements.
Let’s walk through an example. Suppose a company sells pans. The pans cost $10 to make, and they sell the pans to end customers for $100 each. In one month, the business made 200 pans and sold 100 pans to customers, and 15 were returned.
To calculate stock to sales ratio, the company would first have to find the average stock value for the month:
Average stock value = ([200 pans starting in inventory x $10] + [100 pans ending inventory x $10]) / 2
Average stock value = ($2,000 + $1,000) / 2
Average stock value = $3,000 / 2
Average stock value = $1,500
Next, the company would calculate net sales:
Net sales = (100 pans sold x $100) – (15 pans returned x $100)
Net sales = $10,000 – $1,500
Net sales = $8,500
Finally, using the totals for average stock value and net sales, the company would calculate stock to sales ratio:
Stock to sales ratio = $1,500/ $8,500
Stock to sales ratio = 0.176 or 17.6%
Stock to sales ratio vs inventory turnover ratio
While retailers tend to think that the stock to sales ratio and inventory turnover ratio are interchangeable, the two actually measure slightly different things. Here is a breakdown of the subtle differences between the two metrics.
Stock to sales ratio
Inventory turnover ratio
Concerned with the value of the inventory purchased and sold
Concerned itself with the units of the inventory purchased and sold
Compares inventory value (based on the cost of goods sold [COGS]) with the sale price of goods
Compare units bought with units sold
|Helps determine how efficiently your capital is allocated in inventory during a certain time period|
Helps determine how frequently you sell through your inventory or the number of times the inventory is sold during a given period
“We roll out new products and designs on our website 1-3 times a month and send new inventory to ShipBob each week. It’s really easy to create new SKUs and restock existing ones using ShipBob’s technology, which is especially important with high inventory turnover.”
Carl Protsch, Co-Founder of FLEO
How ShipBob can help optimize your stock to sales ratio
No matter how big or small your ecommerce business is, it’s always important to track metrics like stock to sales ratio, inventory turnover, and inventory days on hand — and ShipBob can help you do it.
From your ShipBob dashboard, you can monitor daily inventory history, inventory summaries, SKU velocity, inventory turnover, and more. With this data, you can both track and optimize your inventory levels as order volume increases.
ShipBob’s inventory management software also provides real-time visibility into your inventory levels across different ShipBob fulfillment centers, so that you always know how much stock you have left.
You can also set up automatic reorder point notifications to make sure that you replenish inventory at the optimal time and avoid stockouts.
With ShipBob’s inventory analytics at your disposal, you get the tools and data you need to track inventory levels effectively, forecast demand, and keep just the right amount of product on your shelves to satisfy customers.
“ShipBob’s analytics tool is also really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”
Oded Harth, CEO & Co-Founder of MDacne
Stock to sales ratio FAQs
Here are answers to the top questions about the stock to sales ratio.
What is stock to sales ratio?
The stock to sales ratio measures of the pace at which a company is liquidating its stock. It involves comparing the value of inventory to sales within a specific period.
What is an ideal stock to sales ratio?
The ideal stock to sales ratio may be different for each business, as a healthy ratio is one that indicates that a company has invested in enough inventory to meet demand without over- or understocking. The ideal stock to sales ratio tends to be between 0.167 and 0.25 — but for growing ecommerce businesses, the value can be higher to account for growing order volumes.
How do you calculate stock to sales ratio?
To calculate the stock to sales ratio, divide the average stock value by the net sales value. Here is the ratio formula:
Stock to sales ratio = Average stock value / Net sales value
What happens if the stock to sales ratio is too high?
In the case of a high inventory to sales ratio, you are likely to have surplus stock in your warehouse, which can quickly turn into deadstock if you do not improve sales or offload excess inventory.
What is the most common stock to sales ratio?
Stock to sales ratios fluctuate over time and from business to business. Most retailers aim for a stock to sales ratio between .167 and .25.