What Is the Average Age of Inventory?
Let me explain the average age of inventory to you directly—it's the typical number of days a company holds its inventory before selling it. As a metric, it helps analysts like you gauge how efficiently sales are happening. You might also hear it called days' sales in inventory, or DSI.
Key Insights on Average Age of Inventory
This figure shows you exactly how many days, on average, it takes for a company to sell its inventory. Remember, you should always cross-check it with other metrics, such as gross profit margin, to get the full picture. If a company sells its inventory quickly, it stands to be more profitable. But if the number is climbing, it could point to underlying inventory problems.
Formula and How to Calculate It
Here's the straightforward formula for average age of inventory: it's the average cost of inventory (C) divided by the cost of goods sold (G), then multiplied by 365. So, Average Age of Inventory = (C / G) × 365. C represents the average cost of your inventory at its current level, and G is your COGS. Use this to compute it precisely for any company you're analyzing.
What the Average Age of Inventory Reveals
This metric lets you compare how quickly inventory turns over between companies—the faster it sells for profit, the better the profitability. That said, some companies might keep higher inventory levels on purpose for discounts or long-term strategies. It's a solid efficiency measure, but confirm it with others like gross profit margin before drawing conclusions.
In industries with quick sales cycles, like technology, this number is crucial. A high average age could mean poor inventory management or hard-to-sell stock. It guides purchasing agents in buying decisions and managers in pricing, such as discounting to boost cash flow. As the age increases, so does the risk of obsolescence—where inventory loses value over time or in a weak market. If inventory doesn't move, the company might face write-offs below the balance sheet value.
Example of Using Average Age of Inventory
Consider this scenario: you're an investor comparing two retail companies. Company A has inventory valued at $100,000 and COGS of $600,000. Divide $100,000 by $600,000, multiply by 365, and you get about 60.8 days—meaning it takes roughly two months to sell inventory.
Now, Company B also has $100,000 in inventory, but COGS is $1 million, resulting in 36.5 days. At first glance, Company B is more efficient than Company A in turning over inventory.
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