The days sales of inventory value, or DSI, is a financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory (including goods that are a work in progress, if applicable) into sales. Generally, a lower (shorter) DSI is preferred, but it is important to note that the average DSI varies from one industry to another.
Days sales of inventory, or days inventory, is one part of the cash conversion cycle, which represents the process of turning raw materials into cash. The days sales of inventory is the first stage in that process. The other two stages are days sales outstanding and days payable outstanding. The first measures how long it takes a company to receive payment on accounts receivable, while the second measures how long it takes a company to pay off its accounts payable.
The term inventory turnover refers to the number of times that inventory is sold or used over the course of a particular time period such as a quarter or year. A crucial metric for businesses, especially retailers of physical goods, the inventory turnover ratio measures a company’s efficiency in terms of management, inventory and generation of sales. As with a typical turnover ratio, inventory turnover calculates the amount of inventory that is sold over a period of time. As detailed in the Wal-Mart example, the formula for the inventory turnover ratio is as follows:
Metrics such as inventory ratio and days sales of inventory, specifically, can help inform investment decisions as they can indicate to an investor whether a company can effectively manage its inventory when compared to competitors. A 2013 study published on the Social Science Research Network and entitled Does Inventory Productivity Predict Future Stock Returns? A Retailing Industry Perspective suggests that stocks in companies with high inventory ratios tend to outperform industry averages. Such a stock that brings in a higher gross margin than predicted, can give investors an edge over competitors due to the potential surprise factor. Conversely, a low inventory ratio may suggest overstocking, market or product deficiencies or otherwise poorly managed inventory–signs that generally do not bode well for a company’s overall productivity and performance.