What Is Days Sales of Inventory (DSI)?

Days sales of inventory (DSI) is also known as the 澳洲幸运5开奖号码历史查询:average age of inventory, days inventory outstanding (DIO🎃), days in inventory (DII), days sales in inventory, or days inventory.

Indicating the 澳洲幸运5开奖号码历史查询:liquidity of the inventory, the figure represents how many days a company’s current stock of inventory will last. Generally, a lower DSI is preferred, as it indicates a shorter 🔴duration to clear off the inventory. However, the average DSI varies from one industry to the next.

Days Sales oꦰf Inventory (DSI) Formula and Calculation

$\begin{aligned} &DSI = \frac{\text{Average inventory}}{COGS} \times 365 \text{ days}\\ &\textbf{where:}\\ &DSI=\text{days sales of inventory}\\ &COGS=\text{cost of goods sold}\\ \end{aligned}$​DSI=COGSAverage inventory​×365 dayswhere:DSI=days sales of inventoryCOGS=cost of goods sold​

To manufacture a salable product, a company needs raw material and other resources which form the inventory and come at a cost. Additionally, there is a cost linked to the manufacturing of the salable product using the inventory. Such costs include labor costs and payments towards utilities like electricity, which is represented by the 澳洲幸运5开奖号码历史查询:cost of goods sold (COGS) and is defined as the cost of acquiring or manufacturing the products that a company sells during a period. DSI is calculated based on the average value of the inventory and cost of goods sold during a given period or as of a particular date. Mathematically, the number of days in the corr🐼esponding period is calculated using 365 for a year and 90 for a quarter. In some cases, 360 days is used instead.

The numerator figure represents the valuation of the inventory. The denominator (Cost of Sales / Number of Days) represents the average per day cost being spent by the company for manufacturing a salable product. 💟The net factor gives the average number of days taken by the company to clear the inventory it possesses.

Two different versions of the DSI formula can be used, depending on the accounting practices. In the first veꦬrsion, the average inventory amount is taken as the f♐igure reported at the end of the accounting period, such as at the end of the fiscal year ending June 30. This version represents DSI value as of the mentioned date. In another version, the average value of Start Date Inventory and End Date Inventory is taken, and the resulting figure represents DSI value during that particular period. Therefore,

$\text{Average Inventory} = \text{Ending Inventory}$Average Inventory=Ending Inventory

or

$\text{Average Inventory} = \frac{(\text{Beginning Inventory} + \text{Ending Inventory})}{2}$Average Inventory=2(Beginning Inventory+Ending Inventory)​

COGS value remai♛ns the same in both the versions.

What DSI Tells You

Since DSI indicates the duration of time a company’s cash is tied up in its inventory, a smaller value of DSI is preferred. A smaller number indicates that a company is more efficiently and frequently selling off its inventory, which means rapid turnover leading to the potential for higher profits (assuming that sales are being made in profit). On the other hand, a large DSI value indicates that the company may be struggling with obsolete, high-volume inventory and may have invested too much into the same. It's also possible that the company may be retaining high inventory levels in order to achieve high order fulfillment rates, such as in anticipation of bumper sales during an upcoming holiday season.

However, DSI should be looked upon cautiously as it often lacks context. DSI tends to vary greatly among industries depending on various factors, like product type and business model. Therefore, it is important to compare the value among the same sector peer comp🌟anies. Companies in the technology, automobile, and furniture sectors can afford to hold on to their inventories for long, b𓂃ut those in the business of perishable or fast-moving consumer goods (FMCG) cannot. Therefore, sector-specific comparisons should be made for DSI values.

Irrespecti꧙ve of the single-value figure indicated by DSI, a company management should find a mutually beneficial balance between optimal inventory levels and market demand.

DSI vs. Inventory Turnover

A similar ratio that's related to DSI is inventory turnover, which refers to the number of times a company is able to sell or use its inventory over the course of a particular time period, such as quarterly or annually. Inventory turnover is calculated as the cost of goods sold 🍬divided by average inven🍒tory. It is linked to DSI via the following relationship:

$DSI = \frac{1}{\text{inventory turnover}}\times 365 \text{ days}$DSI=inventory turnover1​×365 days

Basically, DSI is an inverse o💖f inventory turnover over a given period. Higher DSI means lower turnover and vice versa.

In general, the higher the inventory turnover ratio, the better it is for the company, as it indicates a greater generation of sales. A smaller inventory and the same amount of sales will also result in high inventory turnover. In some cases, if the demand for a product outweighs the 澳洲幸运5开奖号码历史查询:inventory on hand, a company will see a loss in sales despite the high turnover ratio, thus confirming t𒅌he importance of contextualizing these figures by comparing them against those of industry competitors.

DSI is the first part of the three-part 澳洲幸运5开奖号码历史查询:cash conversion cycle (CCC), which represents the overall process of turning raw materials into realizable cash from sales. The other two stages are 澳洲幸运5开奖号码历史查询:days sales outstanding (DSO) and 澳洲幸运5开奖号码历史查询:days payable outstanding (DPO). While the𝐆 DSO ratio measures how long it takes a company to receive payme💛nt on accounts receivable, the DPO value measures how long it takes a company to pay off its accounts payable. Overall, the CCC value attempts to measure the average duration of time for which each net input dollar (cash) is tied up in the production and sales process before it gets converted into cash received through sales made to customers.

Why the DSI Matters

Managing inventory levels is vital fo𝐆r most businesses, and it is especially important for retail companies or those selling physical goods. While the inventory turnover ratio is♈ one of the best indicators of a company’s level of efficiency at turning over its inventory and generating sales from that inventory, the days sales of inventory ratio goes a step further by putting that figure into a daily context and providing a more accurate picture of the company’s inventory management and overall efficiency.

DSI and inventory turnover ratio can help investors to know whether a company can 澳洲幸运5开奖号码历史查询:effectively manage its inventory when compared to competitors. One paper suggests that stocks in companies with high inventory ratios tend to outperform industry averages. A stock that brings in a higher 澳洲幸运5开奖号码历史查询:gross margin than predicted can give investors an edge over competitors due to the potential surprise factor. Conversely, a low inventory ratio may suggest overstocking, market or product deficiencies, or otherwise poorly managed inventory–signs that generally do not bode well for a company’s overall productivity and performance.

Example of DSI

Walmart (WMT) had inventory worth $54.9 billion and cost of goods sold worth $490 billion for the fiscal year 2024. DSI is therefore:

DSI = (54.9/490) x 365= 40.9 days

While inventory 🦩value is available on the balance sheet of the company, the COGS value can be sourced from the annual financial statement. Care should be taken to include the sum total of all of the categories of inventory, which includes finished goods, work in progress, raw materials, and progress payments.

Since Walmart is a retailer, it does not have any raw materials, work-in-progress, or𝔉 progress payments. Its entire inventory is compr𝓡ised of finished goods.

The Bottom Line

Days sales of inventory (DSI) is a measure of the effectiveness of inventory management by a company. Inventory forms a significant chunk of the operational capital requirements for a business. By calculating the number of days that a company holds onto the inventory befo𝐆re it is able to sell it, this efficiency ratio measures the average length of time that a company’s cash is locked up in its inventory.