What is Days Sales in Inventory Ratio?

What is meant by the Days sales inventory?

Days' sales in inventory is computed by taking ending inventory divided by cost of goods sold multiplied by 365. This ratio helps us understand how efficiently a company is managing its inventory.

Understanding Days' Sales in Inventory Ratio

Days' sales in inventory ratio is a key financial metric that measures the average time it takes for a company to sell its inventory. It is also known as inventory turnover in days or days sales of inventory. The ratio is calculated by dividing the ending inventory by the cost of goods sold and then multiplying the result by 365 days.

Having a lower days' sales in inventory ratio indicates that the company is selling its goods quickly and efficiently. On the other hand, a higher ratio suggests that the company is taking longer to turn its inventory into sales.

This ratio is particularly important for businesses in retail or manufacturing industries where efficient inventory turnover is crucial for profitability. It helps management to assess how well the company is managing its inventory levels and working capital.