Inventory period (Days inventory outstanding) is one of the indicators of activity, which indicates how many days is the inventory held in stock before it is sold.
If we divide number of days in the year (365) by the indicator of Inventory period, we get the indicator of Inventory turnover ratio.
If we sum up the Inventory and Receivables period days, we get the time during which is the inventory converted into revenue (potentially cash).
Inventory is often the average from the beginning and final balance.
It is possible to use revenues instead cost of goods sold (sales costs, however, are preferable since they do not include margin).
- comparison of companies in different industries makes little sense; on the contrary, benchmark with competition is useful
- meaningful is the comparison over time
- generally, the lower the inventory period, the better
- high values indicate either:
- slowdown in trading (although there are costs in the denominator, they are usually booked at the same time as revenues) – it is necessary to distinguish whether the slowdown in sales is merely relevant for the company only or whether it is the case for the entire industry or economy (recession)
- accumulation of inventories:
- general risks:
- inventory obsolescence and subsequent problems to sell it
- higher costs associated with holding stocks (e.g. costs of storage)
- inventory must be financed somehow, so the company pays "unnecessary" interest
- "justified" reasons:
- bargain purchases or discounts for buying in bulk
- seasonal fluctuations in demand
- expected price increases or shortages of certain stocks
- low values indicate either:
- the acceleration of sales
- low stock values:
- general risks:
- failure to fulfill customer orders
- inability of the company to respond to the challenges arising from the new business opportunities