what the average age of inventory can tell you
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 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 an 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 products 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 example of how to use the average age of inventoryan 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 