What Is Days Sales of Inventory (DSI)?
Let me explain what days sales of inventory, or DSI, really is. You might also hear it called average age of inventory, days inventory outstanding (DIO), days in inventory (DII), days sales in inventory, or just days inventory. It's a straightforward measure of how liquid your firm's inventory is—essentially, how many days it takes to turn that inventory into actual sales.
This number shows you how long your current stock will last based on your sales rate. In general, you want a lower DSI because it means you're clearing out inventory faster. But remember, what's average or ideal differs from one industry to another, so don't compare apples to oranges.
Key Takeaways on DSI
DSI boils down to the average days it takes for a firm to sell off its inventory. Analysts like me use it to gauge how efficiently a company handles its sales. If your DSI is high, it could mean you're not managing inventory well or that you've got stock that's hard to move.
DSI Formula and Calculation
Here's the formula you need: DSI equals average inventory divided by cost of goods sold (COGS), then multiplied by 365 days. COGS covers the costs of acquiring or making the products you sell, including raw materials, labor, and utilities like electricity.
You calculate this based on the average inventory and COGS over a period, say a year (using 365 days) or a quarter (90 days). Sometimes people use 360 days instead. The numerator is your inventory value, and the denominator gives the daily cost of producing salable goods, so the result tells you the days to clear inventory.
There are two ways to handle average inventory depending on your accounting. One uses just the ending inventory for a snapshot at a specific date, like fiscal year-end. The other averages beginning and ending inventory for a period view. COGS stays the same either way.
What DSI Tells You
DSI shows how long your cash is tied up in inventory, so a smaller number is usually better—it means you're selling inventory quickly, leading to faster turnover and potentially more profits if you're making money on those sales. A high DSI might signal obsolete stock, overinvestment in inventory, or just holding extra for high demand periods like holidays.
But take it with a grain of salt; DSI varies a lot by industry due to product types and business models. Compare it only within the same sector—tech or auto companies can hold inventory longer than those dealing in perishables or fast-moving goods. Sometimes a high DSI is smart if you expect shortages and can sell later at higher prices. Ultimately, you need to balance inventory with market demand.
DSI vs. Inventory Turnover
Inventory turnover is related—it's how many times you sell or use inventory in a period, calculated as COGS divided by average inventory. DSI is basically the inverse: DSI equals 1 divided by inventory turnover, times 365 days. Higher turnover means lower DSI, which is generally good for sales generation.
Even with high turnover, if demand exceeds supply, you might lose sales, so context matters—compare to competitors. DSI is part of the cash conversion cycle (CCC), along with days sales outstanding (DSO) for receivables and days payable outstanding (DPO) for payables. CCC measures how long cash is tied up in operations before turning into revenue.
Why DSI Matters
Managing inventory is crucial, especially for retailers or goods sellers. Inventory turnover is a good start, but DSI gives a daily view of efficiency. It helps you see if a company manages inventory well compared to peers. Studies show high inventory ratios can lead to outperforming stocks, thanks to better margins. Low ratios might indicate overstocking or poor management, hurting productivity.
Example of DSI
Take Walmart for fiscal year 2024: They had $54.9 billion in inventory and $490 billion in COGS. So DSI is (54.9 / 490) times 365, which comes to about 40.9 days. You get inventory from the balance sheet and COGS from financial statements—include all types like finished goods, but Walmart's is all finished since they're a retailer.
What Does a Low DSI Indicate?
A low DSI means you're converting inventory to sales efficiently, boosting margins and profits. It's preferred over high DSI, but if it's too low, you might not have enough stock to meet demand, which isn't ideal.
How Do You Interpret DSI?
DSI estimates the average days to sell out current inventory completely.
What Is a Good DSI Number?
Experts say 30 to 60 days is a solid range for efficient inventory management without understocking, but it depends on your industry, size, and other factors.
The Bottom Line
DSI measures how effectively you manage inventory, a big part of your operational capital. It tells you the average days cash is locked in inventory before sales. Keep it in mind for balancing efficiency and demand.
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