Definition of Days’ Sales in Inventory
The financial ratio days’ sales in inventory tells you the number of days it took a company to sell its inventory during a recent year. Keep in mind that a company’s inventory will change throughout the year, and its sales will fluctuate as well. Therefore, you should view this as an average from the past.
The calculation of the days’ sales in inventory is: the number of days in a year (365 or 360 days) divided by the inventory turnover ratio.
Example of Days’ Sales in Inventory
To illustrate the days’ sales in inventory, let’s assume that in the previous year a company had an inventory turnover ratio of 9. Using 360 as the number of days in the year, the company’s days’ sales in inventory was 40 days (360 days divided by 9). Since sales and inventory levels usually fluctuate during a year, the 40 days is an average from a previous time.
It is important to realize that a financial ratio will likely vary between industries. Hence, a company’s ratios should be compared to its own past financial ratios and to the ratios of companies within its industry.
