The inventory to sales ratio is calculated by dividing your inventory balance at the end of any month by your total sales for the same month. So, in your example, if your inventory to sales ratio is 1/4, your inventory balance may have been $20,000 while your total sales were $80,000.

Watching inventory to sales ratio can be very helpful. For example, if you happen to see that this ratio is growing (in this instance, if it were to move up to 2/4, or 3/4) it can mean either you are investing too much in inventory or that your sales are declining.

http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_4260

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