As we discuss about days of inventory first understand inventory is a very important parameter which decides the efficiency of a company to work under adverse or favorable conditions. Financial ratios help in deciding the financial metrics or valuation of the company. There are a lot of ratios used for valuation analysis of a company. We will discuss why inventory is an important metrics for a company’s financial valuation.
Impact of Days of Inventory
It indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales. Indicating the liquidity of the inventory, the figure represents how many days a company’s current stock of inventory will last. Generally, a lower days is preferred as it indicates a shorter duration to clear off the inventory, though the average days varies from one industry to another.
You can also watch the below video on Everything you want to know about Days Inventory Outstanding:
Some of the inventory might be slow-moving owing to the industry it operates in. Hence it is imperative that the similar companies are compared when it comes to calculating this.
Days of Inventory = (Average Inventory/Cost of goods sold)*365
Suppose a company has opening stock worth 5 lacs, it makes purchases worth 10 lac and the closing inventory is 7 lacs. The Cost of goods sold is Opening stock + purchases – closing stock ie 5+10-7= 8 lacs. Average inventory is (5+7)/2= 6. Days of inventory is 6/8*365= 274 days.
With stock edge app we don’t have to calculate Inventory data on our own. StockEdge gives us Inventory data of the last five years of any company listed in the stock exchange with a click in seconds. We can look and compare Inventory data of any company and filter out stocks accordingly.
Suppose we want to look at the Inventory data of Ashok Leyland for the last 5 years. In the home page under stocks type Ashok Leyland, click on the fundamentals tab, we will get Ratios tab. Then in the Ratios tab click on Efficiency Ratios, Inventory data will be seen of Ashok Leyland for 5 years simultaneously.
Days of Inventory is an important barometer to understand whether or not the company is able to utilize its inventory efficiently. This data is easily available under ratios section of each share. We also have scans based on Days of Inventory, with the help these ready-made scans you can with the click of a button filter out good companies. These scans are part of the premium offerings of StockEdge app.