What is Days Inventory Outstanding?
- DIO is sometimes also classified as the number of days’ inventory. It reflects at the date a company Balance Sheet, the number of days it would take to sell all of the stock on hand
- Another of the terms used in this area is ‘stock turnover’ – as with ‘days inventory outstanding’; these measures how efficient a company is at moving its stock on, i.e. selling it. It’s also used to gauge if the company is holding too much inventory or operating with low inventory.
- DIO will vary from company to company and industry to industry. Also, is it just a measure taken at one point in time, and therefore may not be reflective of the company’s real operational efficiency.
How is the figure calculated?
The standard calculation is;
Average Stock Holding for the year/Cost of Sales*365
The Average Stock Holding is calculated taking the average of the two Stock figures shown on the Balance Sheet – the current year and the previous year’s figure
What does the figure indicate?
The primary use of the figure is to compare a company’s practices year on year and also to compare companies within the same industry. A rising number will show that the business is holding significant quantities of stock compared to previous years, and a declining figure shows per se that the company is more efficient at managing its inventory.
It should be a starting point in analyzing how stock managed. If the business has moved into different products or categories of product over a year the measure may not be that effective for comparison purposes. You should look for signs of such business repositioning before drawing any conclusions.
As mentioned, there are drastic differences between the numbers of day’s inventory held across different types of business. A jeweler typically will have a small number of costly items, and it may take weeks, if not months, to sell even some of their more exclusive pieces.
A supermarket could not operate in the same manner. It relies on moving all of its stock over a short period and might have a day’s inventory figure of no more than 5-10
Days Inventory Outstanding is not a ‘one figure measures all sort of calculation.’ It is a starting point and should be used as a basis for further inquiry
However, a growing day’s inventory figure can be potentially concerning. Ditto if a company is performing below its peer group based on this measure. It can, and often is, a sign that the business is finding it more difficult to sell its product lines.
In the short term, there is a cost to this – the business might be utilizing more staff, storage square footing, light, heat, and security if carrying more stock than is optimal. The follow on effect of excess working capital tied up in the business will lead to increased debt levels and interest payments too.
In the medium term, it could also be an indicator that the company is going to have to discount to sell slow-moving items.