Financial Statement Analysis

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**Days Inventory Outstanding –**The job of every company is to transform the inventory into finished goods.

Without having the finished goods in hand, the company won’t be able to sell and make money. That’s why it’s important for an investor to look at the days a company takes to turn its inventory into sales.

It is a financial measure and it tells the investor about how good the company is in handling its inventory.

In this article, we will look at this financial measure in detail.

Let’s get started.

## What is Days Inventory Outstanding (DIO)?

Another name of “days inventory outstanding (DIO)” is “days sales of inventory (DSI)”.

Days Inventory Outstanding tells us how many days a company takes to turn its inventory into Sales. For example, let us look at the graph above. Colgate’s Days Inventory Oustanding has been stable over the years and is currently at 70.66 days. However, when we compare this with Procter and Gamble, we note that P&G’s days inventory outstanding has been decreasing over the years and is currently at 52.39 days.

First, we will look at the formula and then we will understand it further.

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### Days Inventory Outstanding Formula

Here’s the formula –

**Days Sales of Inventory Formula = Inventory / Cost of Sales * 365**

**Interpretation**

There are three components in the cash conversion cycle.

The first one is days sales of inventory. Other two are days sales outstanding and days payable outstanding.

That means we can easily say that days sales of inventory is one of the stages of cash conversion cycle which translates raw materials into cash.

In the formula, we can see that the inventory is divided by the cost of goods sold. This helps us understand the proportion of raw materials in the total cost of sales. Then we multiply that proportion by 365 days which allow us to see the proportion in terms of days.

Let’s take an easy example to illustrate how the whole thing works.

### Days Inventory Outstanding Example

**Company Zing has an inventory of $60,000 and the cost of sales is $300,000. Find out the days inventory outstanding of Company Zing.**

This is a simple days inventory outstanding example.

All we need to do is to put in the figure in the formula.

Here’s the formula –

Days Inventory Outstanding formula = Inventory / Cost of Sales * 365

Or, Days Inventory Outstanding = $60,000 / $300,000 * 365

Or, Days Inventory Outstanding = 1/5 * 365 = 73 days.

That means it takes 73 days to translate the raw materials into cash for Company Zing.

### How would you interpret DIO as an investor?

First of all, days inventory outstanding (DIO) is a measurement of the company’s performance in terms of inventory management.

So, if the days inventory outstanding of a company are low, it means two things –

- First of all, low days inventory outstanding means that company has been effectively using its inventory.
- Secondly, low days inventory outstanding also may mean that the company has not been storing inventory for the required demand or the company has been writing down the values of the inventory.

On the other hand, we need to look at the high days inventory outstanding as well. High days inventory outstanding also means two things –

- High Days Inventory Outstanding means that the company has not been able to translate its inventory into sales quickly.
- It also may mean that the company has been keeping obsolete inventory as well.

Since both low and high days inventory outstanding can’t be interpreted separately, it’s important for an investor to follow few steps while interpreting the low or high days inventory outstanding –

- First of all the investor should also look at the other companies in the similar industry to see whether the DIO is also low or high in the case of the other companies in the similar industry. If yes, then take the next step; if not, then the investor should look other financial ratios of the said company first.
- If the first step yields a similar result, then the investor should look at other companies in the different industry to be sure. She can gather the information of other companies in other industries and then compute the DIO to find out whether the similar companies in the other industries are also providing similar results.
- The point of all of this is to be ensured whether the company in one particular industry is doing good or not. Looking at different companies under same industry and different companies under different industry will give you a holistic perspective to the investor.
- Lastly, the investor should look at other two ratios of the cash conversion cycle as well as other financial ratios of the company she wants to invest in.

### What statements to look at to find out the Days Inventory Oustanding?

If you are a new investor, it may seem difficult for you to find out the inventory and the cost of sales (or cost of goods sold).

That’s why it’s important to know certain aspects of Days Inventory Outstanding.

While calculating days inventory outstanding, we usually take the ending inventory. Or else, we can also take the average of the beginning and the ending inventory. To find out the average, all we need to do is to add up the beginning inventory and the ending inventory and then we need to divide the total by two.

To find out the inventory (average or ending), we need to look at the balance sheet. You will see something like “closing stock” in the balance sheet.

For cost of goods sold, you need to pull out the income statement of the company. And then you need to see the column under “sales”. You will find the item “cost of goods sold”. The difference between sales and cost of goods sold is the gross profit which will be mentioned in the income statement.

Use these two and put into the formula and you would have the company’s days inventory outstanding (DIO).

### Sector Examples

#### Airlines Sector

Below is the Inventory Days Oustanding of top companies in Airline Sector

Name | Market Cap ($ billion) | Days Inventory Outstanding |

American Airlines Group | 24,614 | 22.43 |

Alaska Air Group | 9,006 | 9.37 |

Azul | 7,283 | 6.73 |

China Eastern Airlines | 9,528 | 17.15 |

Copa Holdings | 5,788 | 20.55 |

Delta Air Lines | 39,748 | 18.18 |

Gol Intelligent Airlines | 21,975 | 11.08 |

JetBlue Airways | 6,923 | 7.89 |

LATAM Airlines Group | 8,459 | 12.21 |

Southwest Airlines | 39,116 | 19.29 |

Ryanair Holdings | 25,195 | 0.33 |

United Continental Holdings | 19,088 | 23.33 |

China Southern Airlines | 9,882 | 6.97 |

- Inventory processing days of Airline sector is less than one month for most of the companies.
- Ryanair Holdings has a lowest inventory processing days of 0.33 days, whereas, that of United Continental Holdings has inventory days oustanding of 23.33 days.

#### Example of Automobile Sector

Below is the list of top companies in Automobile Sector along with its Market cap and inventory days outstanding.

Name | Market Cap ($ billion) | Days Inventory Outstanding |

Ford Motor | 50,409 | 24.82 |

Fiat Chrysler Automobiles | 35,441 | 43.65 |

General Motors | 60,353 | 34.65 |

Honda Motor Co | 60,978 | 43.38 |

Ferrari | 25,887 | 69.47 |

Toyota Motor | 186,374 | 34.47 |

Tesla | 55,647 | 113.04 |

Tata Motors | 22,107 | 76.39 |

#### Example of Discount Stores

Below is the list of top companies in Discount Stores along with its Market cap and inventory days outstanding.

Name | Market Cap ($ billion) | Days Inventory Outstanding |

Burlington Stores | 8,049 | 82.21 |

Costco Wholesale | 82,712 | 30.67 |

Dollar General | 25,011 | 76.02 |

Dollar Tree Stores | 25,884 | 73.27 |

Target | 34,821 | 63.15 |

Wal-Mart Stores | 292,683 | 44.21 |

- Burlington Stores has the highest Inventory Days Oustanding of 82.21 days, whereas, that of Wal-Mart Stores is 44.21 days

#### Example of Oil & Gas Sector

Below is the list of top companies in Oil & Gas Sector along with its Market cap and inventory days outstanding.

Name | Market Cap ($ billion) | Days Inventory Outstanding |

ConocoPhillips | 62,980 | 24.96 |

CNOOC | 62,243 | 77.13 |

EOG Resources | 58,649 | 88.81 |

Occidental Petroleum | 54,256 | 65.14 |

Canadian Natural | 41,130 | 32.19 |

Pioneer Natural Resources | 27,260 | 26.50 |

Anadarko Petroleum | 27,024 | 33.29 |

Continental Resources | 18,141 | 84.91 |

Apache | 15,333 | 112.69 |

Hess | 13,778 | 43.29 |

Inventory days oustanding is varied for Oil & Gas sector. One one hand, there is Apache that has inventory processing days of close to 4 months, whereas, ConocoPhillips has inventory processing days of less than one month.

### The case about working capital

As an investor, you also need to keep in mind that whether the company has required working capital at any given moment or not.

To do that, you can look at days inventory outstanding.

Let’s say that a company has low DIO, meaning it takes a long time to transfer inventory into cash. Now what if the days inventory outstanding decreases! That means the days it takes to turn inventory into cash also decreases. In a nutshell, it means the company would have more cash (since the DIO gets faster). As a result, the working capital of the company will also increase.

On the other hand, if DIO increases, the days it takes to turn inventory into cash also increases. In a nutshell, the company would have less cash. That means the condition of working capital of the company will also deteriorate.

### Additional Resources

This was the guide to Days Inventory Oustanding, Days Inventory Outstanding Formula, and its examples. You may also have a look at the below articles learn further –

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