Hey Monkeys,
Happy Holidays!
I have a question regarding days inventory outstanding calculation and would be grateful if anyone could shed light upon.
We typically use Average Inventory/COGS × 365. But do we use COGS if it includes cost rather than inventory cost, e.g., Depreciation and Labor? Can we only use the inventory part of COGS? And what is the intuition?
Appreciate the help.
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Look at equity research and see how they calculate inventory days and if they are similar to yours. That’s one approach. Also when you project, look at the numbers and verify they are similar to historical or at least same trend
Generally, I would on take out depreciation because it is non cash but keep labor> argument is you get this much inventory as % of costs and people directly working on it, you need more labor to be able to pile on more inventory (labor is direct costs).
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