Days Inventory Outstanding (Formula, Example)

Days Inventory Outstanding refers to the financial ratio that calculates the average numbers of days of inventory that is been held by the company before selling it to the customers, thereby giving a clear picture of the cost of holding and potential reasons for delay in selling inventory.

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 DIO 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 day’s 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.

Days Inventory Outstanding Formula

Here’s the formula –

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

Interpretation

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Source: Days Inventory Outstanding (DIO) (wallstreetmojo.com)

There are three components in the cash conversion cycle.

The first one is days sales of inventory. The other two are days sales outstandingDays Sales Outstanding Days sales outstanding portrays the company's efficiency to recover its credit sales bills from the debtors. The number of days debtors took to make the payment is computed by multiplying the fraction of accounts receivables to net credit sales with 365 days.read more and days payable outstandingDays Payable Outstanding Days Payable Outstanding (DPO) is the average number of days taken by a business to settle their payable accounts. DPO basically indicates the credit terms of a business with its creditors. read more.

That means we can easily say that days sales of inventory is one of the stages of the 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. It helps us understand the proportion of raw materials in the total cost of sales. Then we multiply that proportion by 365 days, which allows 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.

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 SalesCost Of Sales The costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more * 365

Or, DIO = $60,000 / $300,000 * 365

Or, DIO = 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 DIO means that the company has been effectively using its inventory.
Secondly, low DIO 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 DIO –

First of all, the investor should also look at the other companies in a similar industry to see whether the DIO is also low or high in the case of the other companies in a similar industry. If yes, then take the next step; if not, then the investor should look at other financial ratiosFinancial Ratios Financial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more of the said company first.
If the first step yields a similar result, then the investor should look at other companies in a 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 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 the same industry and different companies under different industry will give you a holistic perspective to the investor.
Lastly, the investor should look at the other two ratios of the cash conversion cycleCash Conversion Cycle The Cash Conversion Cycle (CCC) is a ratio analysis measure to evaluate the number of days or time a company converts its inventory and other inputs into cash. It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.read more 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 DIO, we usually take the ending inventoryEnding Inventory The ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more. 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 sheetClosing Stock Closing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more.

For the cost of goods sold, you need to pull out the income statement of the companyIncome Statement Of The Company The income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more. 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 soldCost Of Goods Sold The Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more 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 the 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 the Airline sector is less than one month for most of the companies.
Ryanair Holdings has the lowest inventory processing days of 0.33 days, whereas that of United Continental Holdings has inventory days outstanding of 23.33 days.

Example of Automobile Sector

Below is the list of top companies in the Automobile Sector, along with its Market capMarket Cap Market capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more 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 the 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 outstanding is varied for the Oil & Gas sector. On the 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 capitalWorking Capital Working capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)"read more 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 the working capital of the company will also deteriorate.

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Days Inventory Outstanding (DIO)