Days Inventory Outstanding
Days Inventory Outstanding (DIO), also known as the inventory days or days in inventory, is a financial metric that measures the average number of days a company takes to sell its inventory during a specific period. It provides insight into the efficiency of a company's inventory management and indicates how well the company is converting its inventory into sales. A lower DIO generally implies that a company is selling its inventory more quickly, which is favorable for cash flow and reduces the risk of holding obsolete inventory. Conversely, a higher DIO suggests that the company takes longer to sell its inventory, which can tie up cash and increase carrying costs.
To calculate Days Inventory Outstanding, use the following formula:
DIO = (Average Inventory / Cost of Goods Sold) × Number of Days in Period
Where:
- Average Inventory is the average value of the inventory during the period, usually calculated as the sum of the beginning and ending inventory values divided by two.
- Cost of Goods Sold (COGS) represents the total cost of producing the goods that were sold during the period.
- Number of Days in Period refers to the number of days in the accounting period, typically 365 days for a year or 90 days for a quarter.
For example, if a company's average inventory is $5 million, its cost of goods sold for the year is $20 million, and there are 365 days in the year, the DIO would be:
DIO = ($5,000,000 / $20,000,000) × 365 = 91.25 days
This means it takes the company an average of 91.25 days to sell its inventory.
It's important to note that the ideal DIO varies depending on the industry and the nature of the business. Companies in industries with fast inventory turnover, such as grocery stores or e-commerce, typically have lower DIOs, while those in industries with slower inventory turnover, such as heavy machinery or luxury items, may have higher DIOs. To assess a company's DIO performance, it's helpful to compare it with industry benchmarks and track its DIO trends over time.