Inventory turnover ratio indicates how many days the company takes to convert the inventory into Sales
Formula
Inventory days = 365 / Inventory Turnover
Example
The ITR (Inventory turnover ratio) of the company ABC is 8.2. Then the Inventory days is 44.5 days.
The company takes 44.5 days to convert its inventory into Sales.
How to use it practically
Maintaining shorter inventory days is very important in maintaining efficient working capital management. The company with shorter days of inventory should be preferred rather than the company which has longer inventory days.
Inventory days should be looked at along with receivable days and payables days to get a better understanding of the cash conversion cycle of the business. If the company’s inventory days are increasing much faster than the sales growth of the company, then this indicates that the company is struggling to convert its inventory into sales.
Analyzing inventory days become much necessary in manufacturing companies, utility companies, and capital heavy businesses because these are the companies that have huge amounts of inventory in their balance sheet.
Normally, capital-light companies and service-related companies don’t have many of inventories in their balance sheet, so analyzing inventory days become less valuable.
Always looks for companies which are reduced their inventory days in the last few years and this alone can give a sense of how prudent the management is in handling inventory management.