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.

What is a good age of inventory ratio?

A good inventory turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months.

How do you calculate average age of inventory?

The average age of inventory is calculated by taking the average inventory balance and dividing it by the cost of goods sold (COGS) It includes material cost, direct for the period and then multiplying it by 365 days. The average age of inventory is calculated over a period of one year.

What’s the average age of inventory for a company?

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.

Which is the best measure of inventory turnover?

Inventory turnover (days) – breakdown by industry Inventory turnover is a measure of the number of times inventory is sold or used in a given time period such as one year Calculation: Cost of goods sold / Average Inventory, or in days: 365 / Inventory turnover.

How does the age of inventory affect the balance sheet?

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.

What’s the average inventory of a food retail company?

Assume that you are an investor that is deciding on whether to invest in two food retail companies. Company A reports an average inventory of $200,000 and COGS of $1,000,000. Company B reports an average inventory of $100,000 and COGS of $1,500,000.