Days Sales Of Inventory - DSI

DEFINITION
The days sales of inventory value, or DSI, is a financial measure of a company's
performance that gives investors an idea of how long it takes a company to turn its inventory
(including goods that are a work in progress, if applicable) into sales. Generally, a lower
(shorter) DSI is preferred, but it is important to note that the average DSI varies from one
industry to another.
Here is how the DSI is calculated:

The term days sales of inventory is also referred to as days inventory outstanding (DIO), days
in inventory (DII) or, simply, days inventory.
Days sales of inventory, or days inventory, is one part of the cash conversion cycle, which
represents the process of turning raw materials into cash. The days sales of inventory is the
first stage in that process. The other two stages are days sales outstanding and days payable
outstanding. The first measures how long it takes a company to receive payment on accounts
receivable, while the second measures how long it takes a company to pay off its accounts
payable.
To learn more about the cash conversion cycle, see Understanding the Cash Conversion
Cycle.
DSI is one measure of inventory effectiveness. By calculating the number of days that a
company holds onto inventory before selling, the efficiency ratio measures the average length
of time that a companys cash is tied up in inventory. The calculation gives further
perspective to the overall inventory ratio by putting the figure into a daily context. The
formula for DSI, equivalent to the average days to sell the inventory, is calculated as follows:
(Inventory / Cost of Sales) * 365
This metric taken on its own, however, lacks context. DSI tends to vary greatly between
industries, depending on product type, business model, etc. Therefore, it is important to
compare the value to that of other similar companies. For example, businesses that sell
perishable or fast-moving products such as food items will have a lower DSI than those that
sell non-perishable or slow-moving products such as cars or furniture.
As an example of the application of these important metrics, take Wal-Mart Stores, Inc.
(WMT), which in 2014 reported annual sales of approximately $476 billion. Its year-end
inventory equaled $44.9 billion, while its annual cost of sales was $358.1 billion. Thus, WalMarts inventory turnover for the year would be calculated as such:

$358.1 billion / $44.9 billion = 8

And the global retail giants DSI would be calculated accordingly, indicating that Wal-Mart
sells its entire inventory within a quick 46-day period:
(1 / 8) * 365 = 46

Inventory Turnover
The term inventory turnover refers to the number of times that inventory is sold or used over
the course of a particular time period such as a quarter or year. A crucial metric for
businesses, especially retailers of physical goods, the inventory turnover ratio measures a
companys efficiency in terms of management, inventory and generation of sales. As with a
typical turnover ratio, inventory turnover calculates the amount of inventory that is sold over
a period of time. As detailed in the Wal-Mart example, the formula for the inventory turnover
ratio is as follows:
Cost of Goods Sold / Average Inventory
or
Sales / Inventory
In general, the higher inventory turnover ratio, the better it is for the company, as it indicates
a greater generation of sales. In the same vein, a smaller inventory and the same amount of
sales will also result in a high inventory turnover. In some cases, if the demand for a product
outweighs the inventory on hand, a company will see a loss in sales despite the high turnover
ratio, thus confirming the importance of contextualizing these figures by comparing them
against those of industry competitors.
To learn more about the inventory turnover ratio, read the following FAQ: How Do I
Calculate the Inventory Turnover Ratio? For more information on efficiency metrics, see the
article on Measuring Company Efficiency.

Why It Matters
Metrics such as inventory ratio and days sales of inventory, specifically, can help inform
investment decisions as they can indicate to an investor whether a company can effectively
manage its inventory when compared to competitors. A 2013 study published on the Social
Science Research Network and entitled Does Inventory Productivity Predict Future Stock
Returns? A Retailing Industry Perspective suggests that stocks in companies with high
inventory ratios tend to outperform industry averages. Such a stock that brings in a higher
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 inventorysigns that generally do not bode
well for a companys overall productivity and performance.
While these correlations seem intuitive, it is important to note possible exceptions. In some
cases, a low inventory ratio may be preferred, for instance if inventory is increased in

anticipation of a market shortage or a rapid price increase. If inventory is selling slowly, then
a surplus is certainly not desirable. On the other hand, a shortage of inventory can lead to a
higher ratio of turnover, though the company may experience a loss in sales. This is to say
that it is important to find a mutually beneficial balance between optimal inventory levels and
market demand.
For more information on the importance of inventory turnover and days sales of inventory,
read the article What Does a High Inventory Turnover Tell Investors About a Company?
In summation, managing inventory levels is vital for 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 companys 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 companys inventory management and overall efficiency.