What is the average age of inventory?
The average age of inventory (also called days’ sales in inventory, DSI) measures how many days, on average, a company holds merchandise before it is sold. It’s an operational efficiency metric used by managers and analysts to monitor inventory management, cash conversion, and obsolescence risk.
Key definitions
– Average inventory: a representative inventory balance for the period (often (beginning inventory + ending inventory) / 2). Use the same accounting basis (FIFO, LIFO, weighted average) for comparisons.
– Cost of goods sold (COGS): the total cost to produce or purchase the goods that were sold during the period.
– Days’ sales in inventory (DSI): the average number of days inventory sits in stock before being sold; the same as average age of inventory.
– Obsolescence risk: the chance inventory loses value over time (e.g., due to product aging, technological change, or seasonality).
Formula and step‑by‑step calculation
Formula:
Average age of inventory (days) = (Average inventory / COGS) × 365
Step‑by‑step:
1. Choose a time period (commonly one year).
2. Calculate average inventory for that period (e.g., (beginning inventory + ending inventory) / 2).
3. Obtain COGS for the same period from the income statement.
4. Divide average inventory by COGS.
5. Multiply the result by 365 (days in a year). Some practitioners use 360; use the same convention across comparisons.
Interpretation — what the number tells you
– Lower DSI (fewer days): inventory turns faster; typically better liquidity and lower holding costs.
– Higher DSI (more days): inventory moves more slowly; may signal weak demand, overstocking, or seasonal buildup.
– Industry context matters: capital‑intensive or long‑lead industries naturally have higher DSI than fast‑moving retail or tech.
– Use alongside other metrics (inventory turnover ratio, gross profit margin, sales trends) before drawing conclusions.
Practical caveats and limitations
– Accounting methods (FIFO vs. LIFO) change reported COGS and inventory values; compare companies using the same method when possible.
– Seasonal businesses should use rolling averages or matching seasonal periods.
– A low DSI doesn’t guarantee profitability: a firm might sell quickly but at low margins. Verify with gross profit and operating metrics.
– High inventory age increases the chance of write‑downs and markdowns.
Checklist — when you calculate DSI
– [ ] Choose the analysis period (e.g., trailing 12 months).
– [ ] Compute average inventory for that period.
– [ ] Retrieve matching-period COGS.
– [ ] Confirm accounting policies (inventory valuation method).
– [ ] Compute (Average inventory / COGS) × 365.
– [ ] Compare to industry peers and historical company trend.
– [ ] Cross-check with gross margin, inventory turnover, and notes on obsolescence.
Worked example (numeric)
Two retailers each have inventory with a book value of $100,000 at year‑end.
Company A:
– Average inventory = $100,000
– Annual COGS = $600,000
Calculation: (100,000 / 600,000) × 365 = 0.1666667 × 365 ≈ 60.8 days
Interpretation: Company A holds inventory about two months on average.
Company B:
– Average inventory = $100,000
– Annual COGS = $1,000,000
Calculation: (100,000 / 1,000,000) × 365 = 0.1 × 365 = 36.5 days
Interpretation: Company B turns inventory faster (~1.2 months) and, all else equal, is more efficient at converting stock into sales.
Actionable uses
– Purchasing: set reorder timing and lot sizes.
– Pricing: decide on promotions or markdowns to accelerate sales.
– Financial analysis: estimate working capital tied up in inventory and the cash conversion cycle.
Sources
– Investopedia — Average Age of Inventory (Days’ Sales in Inventory): https://www.investopedia.com/terms/a/average-age-of-inventory.asp
– Corporate Finance Institute — Days Inventory Outstanding (DIO): https://corporatefinanceinstitute.com/resources/knowledge/finance/days-inventory-outstanding-dio/
– U.S. Securities and Exchange Commission — Beginners’ Guide to Financial Statements: https://www.sec.gov/oiea/Article/financial-statements.html
– AccountingTools — Days’ Sales in Inventory (DSI): https://www.accountingtools.com/articles/days-sales-in-inventory-dsi.html
Educational disclaimer
This explainer is for educational purposes and does not constitute personalized investment advice. Use this information to inform your own analysis and consult a qualified financial professional before making investment or business decisions.