Understanding Inventory Days
Inventory Days is an Efficiency metric that indicates how many days it takes for a company to convert its inventory into sales. It is calculated as dividing 365 days divided inventory turnover ratio. Inventory Days are also known as 'Days in Inventory', 'Inventory Days of Supply', 'Inventory Period', and 'Days Inventory Outstanding'.
The formula to derive Inventory Days
Inventory Turnover Ratio - Inventory Turnover Ratio indicates how efficiently a company manages its inventory and how quickly it is converted into sales. It is calculated as the cost of goods sold divided by average inventory.
Example of Inventory Days: For the financial year, Jubliant Foodworks limited reported an Inventory Turnover Ratio of 12.93.
The value as per the formula [365 (Days) / Inventory Turnover Ratio] is calculated as (365 / 12.93) =28.23.
Key Highlights
Inventory Days and Inventory Turnover Ratio shares the same information. Inventory days are calculated by dividing the 365 days by the inventory turnover ratio.
Generally, the minimum inventory days are considered good, but companies with maximum Inventory Days always do not mean that the company is not doing well because every industry is different.
Compare companies that operate in the same industry for better analysis. Inventory days differ from one industry to another.
While looking at the Inventory Days, the following points should also take into consideration:
Minimum Inventory Days, the better it is as it indicates that the company is quick to convert its inventory into sales. Maximum Inventory Days shows that the company is slower or taking so many days to convert their inventory into sales.
Maximum Inventory Days always does not mean that the company is not doing well because every industry is different. Some companies may have slow-moving inventory depending on the industry (like automobiles).
It measures how long does the company takes to process raw material to work in progress, work in progress to finished goods, and finished to sales. And it expressed the number of days the company required to process all. As the example shown above, Jubliant Foodworks inventory days are 28.23, which means it takes 28.23 days to convert its inventory into sales.
Inventory turnover ratio and inventory days used the same financial information. By dividing 365 days by the inventory turnover ratio, we get the value of inventory days.
How to use Inventory Days effectively
Investors should look for a company with minimum inventory days. It indicates that the company is taking fewer days to convert its inventory into sales.
For better analysis, compare the company with its industry peers because the number of days differs from industry to industry. FMCG industry's inventory days will be less compared to the automobile industry.
While doing analysis, also look at other relative ratios with inventory days such as
Inventory Turnover Ratio,
Account Receivable Turnover Ratio,
Account Receivable Days,
Operating Cycle, etc.,
