This ratio takes the inventory turnover ratio into consideration and measures the average number of days it takes a company to sell its inventory.
The Formula is:
365 Days / Inventory Turnover
Example:
Adequate Disclosure, Inc. plans to invest into Inadequate Disclosure, Inc. The financial analysts decide that the inventory turnover in days is a great indicator to determine if Inadequate Disclosure, Inc. is worth an investment of $100,000. The industry average is around 300 days. Calculate the inventory turnover in days for Inadequate Disclosure, Inc.
- Cost of Goods Sold / (Beginning Inventory + Ending Inventory/ 2)
- $987,000 / ($560,000 + $700,000/2) = $987,000/$630,000 = 1.56
- 365/1.56 = 234