## What is 'Average Age Of Inventory'

The average age of inventory is the average number of days it takes for a firm to sell off inventory. It is a metric that analysts use to determine the efficiency of sales.

The average age of inventory is also referred to as days' sales in inventory (DSI).

Next Up

## BREAKING DOWN 'Average Age Of Inventory'

The average age of inventory tells the analyst how fast inventory is turning over at one company compared to another. The faster a company can sell inventory for a profit, the more profitable it is. However, a company could employ a strategy of maintaining higher levels of inventory for discounts or long-term planning efforts. While the metric can be used as a measure of efficiency, it should be confirmed with other measures of efficiency, such as gross profit margin, before making any conclusions.

The formula to calculate the average age of inventory is C/G x 365

--- where C is the average cost of inventory at its present level, and G is the cost of goods sold (COGS).

## Average Age of Inventory Example

An investor decides to compare two retail companies. Company A owns inventory valued at \$100,000 and the COGS is \$600,000. The average age of Company A's inventory is calculated by dividing the average cost of inventory by the COGS and then multiplying the product by 365 days. The calculation is \$100,000 divided by \$600,000, multiplied by 365 days. The average age of inventory for Company A is 60.8 days. That means it takes the firm approximately two months to sell its inventory.

Conversely, Company B also owns inventory valued at \$100,000, but the cost of inventory sold is \$1 million, which reduces the average age of inventory to 36.5 days. On the surface, Company B is more efficient than Company A.

## Interpreting the Results

The average age of inventory is a critical figure in industries with rapid sales and product cycles, such as the technology industry. A high average age of inventory can indicate that a firm is not properly managing its inventory or that it has inventory that is difficult to sell.

The average age of inventory helps purchasing agents make buying decisions and managers make pricing decisions, such as discounting existing inventory to move product and increase cash flow. As a firm's average age of inventory increases, its exposure to obsolescence risk also grows. Obsolescence risk is the risk that the value of inventory loses its value over time or in a soft market. If a firm is unable to move inventory, it can take an inventory write-off for some amount less than the stated value on a firm's balance sheet.

RELATED TERMS
1. ### Average Inventory

Average inventory is a calculation that estimates the value or ...
2. ### Inventory

Inventory is the term for merchandise or raw materials on hand.
3. ### Ending Inventory

Ending inventory is a common financial metric measuring the final ...
4. ### Periodic Inventory

The periodic inventory system is a method of inventory valuation ...

Business inventories is an economic figure that tracks the dollar ...
6. ### Obsolete Inventory

Obsolete inventory is a term that refers to inventory that is ...
Related Articles
1. Investing

### How to Calculate Average Inventory

Average inventory is the median value of an inventory at a specific time period.
2. Investing

### Understanding Periodic vs. Perpetual Inventory

An overview of the two primary inventory accounting systems.
3. Investing

### Why It Is Important to Follow Crude Oil Inventories

Discover what oil inventories are, how they are communicated and what important insights they provide into the state of the oil market.
4. Investing

### EIA vs. API: Comparing Crude Inventories Announcements

Between the two major oil inventory reports: the API and the U.S. EIA, which is more highly regarded and why?
5. Investing

### Best Time to Buy a House? NOW

If you're looking to buy your first home, fall is the season when inventories are at their peak. The best time to buy a house could be right now.
6. Investing

### Mixed Oil Inventory Data Caps Crude Prices

Oil prices were capped by strong U.S. oil production that overshadowed weak crude inventory stocks and gasoline declines.
7. Investing

### How Working Capital Works

A firm's handling of working capital reflects its efficiency, financial strength and cash flow.
8. Investing

9. Investing

### Read This Before You Sell

There are five tell-tale signs that show when to walk away from an investment.
RELATED FAQS
1. ### How do you analyze inventory on the balance sheet?

Learn how to analyze inventory using financial statements and footnotes by doing ratio analysis and performing qualitative ... Read Answer >>
2. ### How to calculate the inventory turnover ratio?

The inventory turnover ratio is a key measure for evaluating how effective a company's management is at managing inventory ... Read Answer >>
3. ### What does a high inventory turnover tell investors about a company?

Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into sales. Read Answer >>
4. ### What are the main benefits of a JIT (just in time) production strategy?

Learn about the just in time (JIT) business strategy and how using an on-demand production process can increase a company's ... Read Answer >>
5. ### How is work in progress (WIP) typically measured in accounting?

Understand what work in progress is and why a company would have this on its financials. Learn how work in progress is typically ... Read Answer >>
6. ### What do efficiency ratios measure?

Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >>
Hot Definitions
1. ### Socially Responsible Investment - SRI

Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...

The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
3. ### Futures Contract

An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
4. ### Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
5. ### Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
6. ### Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...