What is Days Sales of Inventory (DSI)?
Days sales of inventory is a ratio of inventory to sales. The formula is:
Days Sales of Inventory = (Inventory/Cost of Sales) x 365
How Does Days Sales of Inventory (DSI) Work?
For example, let's say that XYZ Company had $15 million cost of sales for the year and $50,000 in inventory today. Using this information and the formula above, we can calculate that Company XYZ's DSI is:
DSI = ($50,000/$15,000,000) x 365 = 1.2166
Thus, we can say that Company XYZ burns through its inventory in about 1.2 days.
Why Does Days Sales of Inventory (DSI) Matter?
Days sales of inventory is a measure of how long it takes a company to sell off inventory.
Analysts are sensitive to decreases in DSI. They generally suggest a company is selling products much more quickly or is acquiring inventory too slowly. Increases in DSI, on the other hand, generally suggest sales are slowing down or the company is buying too much inventory.
When not managed carefully, businesses can grow themselves out of cash by needing more capital to fulfill demand and expansion plans than they can generate in their current state. As a result, rapid DSI increases can cause many businesses to fail even though they may actually turn a profit. The most efficient companies acquire inventory wisely to avoid these situations.
It is also important to understand that DSI expectations and benchmarks vary from industry to industry, especially considering how different industries depend on expensive equipment, use different accounting methods, and approach other industry-specific matters. For these reasons, comparison of DSI is generally most meaningful among companies within the same industry, and the definition of a 'high' or 'low' ratio should be made within this context.
