Days Sales of Inventory (DSI)

Days Sales of Inventory (DSI)

What is DSI?

Days Sales of Inventory (DSI) measures how many days, on average, a company holds inventory before selling it. It gauges inventory liquidity and operational efficiency: lower DSI generally indicates faster turnover and less cash tied up in inventory, while higher DSI can signal slow-moving, obsolete, or intentionally stocked inventory.

Formula and calculation

DSI is normally calculated for a year (365 days) but can be adjusted for other periods (e.g., 360 days or 90 days for a quarter).

DSI = (Average Inventory / Cost of Goods Sold) × 365

Where:
– Average Inventory = Ending Inventory (or (Beginning Inventory + Ending Inventory) / 2)
– Cost of Goods Sold (COGS) = total cost to produce or purchase the goods sold during the period

Example steps:
1. Obtain average inventory and annual COGS from the balance sheet and income statement.
2. Divide average inventory by COGS.
3. Multiply the result by 365 to get the number of days.

Relationship to inventory turnover

Inventory turnover = COGS / Average Inventory

DSI is the inverse of inventory turnover expressed in days:
DSI = 365 / Inventory turnover

Higher inventory turnover → lower DSI (faster selling). Lower turnover → higher DSI (slower selling).

How to interpret DSI

• Low DSI: Efficient inventory management, quicker conversion to sales. Extremely low DSI can indicate insufficient stock and potential lost sales.
• High DSI: Possible overstocking, slow sales, or obsolete goods. In some cases (e.g., deliberate stockpiling ahead of shortages or seasonal demand), a higher DSI may be strategic.
• Compare DSI to industry peers and historical company trends—acceptable levels vary widely by industry, product type, and business model (e.g., perishable goods vs. heavy equipment).

Why DSI matters

• Shows how long cash is tied up in inventory, affecting liquidity and working capital needs.
• Helps investors and managers assess inventory efficiency and operational performance.
• Is a component of the cash conversion cycle (CCC), alongside Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO), which together measure how quickly a company converts inputs into cash.

Practical considerations and tips

• Use the same method of averaging inventory and the same day-count (365 vs. 360) when comparing companies.
• Break down inventory categories (finished goods, work in progress, raw materials) if available—some firms’ inventory mixes affect DSI meaningfully.
• Look at trends over multiple periods and compare to industry benchmarks rather than relying on a single DSI value.
• Consider seasonality: retailers may hold more inventory before peak seasons, temporarily raising DSI.

Example

Walmart (FY 2024):
– Inventory = $54.9 billion
– COGS = $490 billion
DSI = (54.9 / 490) × 365 ≈ 40.9 days

This means Walmart, on average, held its inventory for about 41 days before selling it that year.

What is a “good” DSI?

There is no universal standard; many experts cite a general target range of 30–60 days as reasonable for many retailers, but acceptable DSI varies by industry. Always compare to peers and the company’s historical performance.

Bottom line

DSI is a concise measure of how efficiently a company converts inventory into sales and how long cash remains tied up in stock. Proper interpretation requires context—industry norms, seasonality, inventory composition, and management strategy are all essential to determine whether a given DSI is healthy or problematic.