Inventory Turnover & Days of Inventory Calculator

Understanding the inventory turnover and days of inventory — concept and principle

Inventory turnover tells you how many times a business sells through its average stock in a year, and days inventory outstanding (DSI) translates that into how many days goods sit in stock before they are sold. Both are standard efficiency ratios used by owners, buyers, lenders and analysts to judge whether stock levels fit sales. This calculator uses cost of goods sold and the opening and closing inventory values. It works with any currency.

How it is calculated

• Average inventory = (inventory at start + inventory at end) ÷ 2
• Inventory turnover = cost of goods sold ÷ average inventory
• DSI = 365 ÷ inventory turnover

All three money inputs should be at cost and cover the same 12-month period. Turnover is a pure number (times per year); DSI is in days.

The principle

Cost of goods sold is the cost value of everything that left inventory through sales during the year. Dividing it by the stock you normally hold shows how many times that stock was replaced. COGS is used rather than sales revenue because inventory is recorded at cost; using revenue would mix selling prices with cost and overstate turnover by the markup. Averaging the opening and closing figures smooths out one-off changes, although a strongly seasonal business may need monthly averages for a fair picture.

Worked example

1. Inputs: COGS $900,000, start inventory $140,000, end inventory $160,000.
2. Average inventory = (140,000 + 160,000) ÷ 2 = $150,000.
3. Turnover = 900,000 ÷ 150,000 = 6×.
4. DSI = 365 ÷ 6 = 60.83, shown as 60.8 days.

How to read the result

Higher turnover and fewer days usually mean less cash tied up in stock and a lower risk of obsolete goods. Too high, though, can mean frequent stock-outs and lost sales. What counts as good depends heavily on the industry: fresh food retailers turn stock very fast, while sellers of furniture, machinery or jewellery hold goods much longer. Compare against your own history and similar companies, and watch the trend; a DSI rising from 60 to 75 days with flat sales is an early warning of slow-moving stock.

Common mistakes

• Using sales revenue instead of COGS, which inflates turnover.
• Mixing inventory valued at retail with COGS at cost.
• Using one year-end balance for a seasonal business.
• Comparing companies that use different inventory valuation methods without adjustment.

Frequently asked questions

Some sources use 360 days. Does it matter?

Using 360 gives 60 days in this example instead of 60.8. Either is fine if you stay consistent when comparing.

How does DSI relate to the cash conversion cycle?

The cash conversion cycle equals DSI plus days sales outstanding minus days payables outstanding. DSI is the inventory part of how long cash is tied up.

Can I calculate it for a single product?

Yes. Use that product's cost of goods sold and its average stock value at cost.

Sources: Ross, Westerfield and Jordan, Fundamentals of Corporate Finance (McGraw-Hill)