Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Days Sales of Inventory (DSI)

What it is:

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 it works (Example):

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 it Matters:

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.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...