Days Inventory Outstanding DIO: What Retailers Need to Know 2022

That’s why an investor needs to look at the days a company takes to turn its inventory into sales. DIO, or “days inventory outstanding”, measures the number of days required for a company to sell off the amount of inventory it has on hand. One must also note that a high DSI value may be preferred at times depending on the market dynamics. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Even with a high turnover ratio, a company may occasionally experience sales declines if the demand for a product exceeds the inventory on hand. This confirms the need for contextualizing these numbers by contrasting them with those of industry competitors.

• DSI is a measure of the effectiveness of inventory management by a company.
• The business exclusively handles finished products that are ready for sale, so it has no raw materials or products currently being manufactured.
• Company Zing has an inventory of $60,000, and the cost of sales is $300,000.
• The average number of days it takes a business to complete this cycle once is called Days Inventory Outstanding.
• This could include the cost of paying employees, buying raw materials, and payments made towards utilities such as water and electricity.

Next is the cost of goods sold, which highlights the amount of resources invested in the inventory sold over a period of time. There are multiple ways to interpret your DIO findings and plenty of aspects that can affect the meaning of the numbers. However, there’s only one formula for calculating your days inventory outstanding. The point of these examples is to highlight how important it is to realize the uniqueness of your business. Concepts such as DIO, profit margins, cost of goods sold, and accounts receivable are valuable ones on which to base your decision-making.

How to Calculate Days Inventory Outstanding (DIO)?

As earlier indicated, what is considered a good or bad DIO may vary from industry to industry. Regardless, a low day’s inventory outstanding is generally accepted as an indication that a company is able to quickly turn its inventory into sales. The formula for calculating inventory outstanding is quite simple, contrary to what most people would be prompted to assume. Days Inventory Outstanding is calculated based on the average value of the inventory and cost of goods sold in a given reporting period. With a low DIO, stock is selling quickly, and you can look to resupply, increase order quantities, or use your operating cash flow for other critical resources.

This is why many investors pay attention to the amount of time it takes for businesses to turn inventory into sales. Inventory turnover is a metric that measures the number of times a company’s inventory is sold and replaced over a given period. In other words, it tells you how often inventory levels are replenished. Days inventory outstanding , also known as days in inventory, is a metric used to measure the average number of days that a company’s inventory remains unsold. In other words, it tells you how long a product sits on shelves before a customer buys it. The average inventory figure is used in the calculation, rather than the inventory balance on a specific date, because inventory levels can change significantly by day.

What is Days Inventory Outstanding – Formula & Interpretation

Company Zing has an inventory of $60,000, and the cost of sales is $300,000. In the next step, we will carry forward the inventory turnover assumption of 5.0x and the DIO assumption of 73 days to project future inventory levels. In order to efficiently manage inventories and balance idle stock with being understocked, many experts agree that a good DSI is somewhere between 30 and 60 days. This, of course, will vary by industry, company size, and other factors. A low DSI suggests that a firm is able to efficiently convert its inventories into sales.

In fact, it means the company is selling products quickly, similar to just-in-time inventory. It may also signify that there is adequate customer demand for the products you’re offering, also known as high demand products. Some businesses take an alternative view of the measurement, preferring to accept a longer days of inventory figure in order to carve out a service niche. For example, a business may choose to maintain high inventory levels in order to advertise that it can fill any customer order within 24 hours of order receipt. In exchange for maintaining a large inventory investment, the company charges a high price for its goods.

What DSI Tells You

Cost of Goods Sold is defined as the cost of producing goods sold during the reporting period. This could include the cost of paying employees, buying raw materials, and payments made towards utilities such as water and electricity. For instance, most companies buy loads of goods at the beginning of the year and proceed to sell throughout the year. If we were to apply this formula, the ending inventory would therefore not mirror the actual average inventory. Imagine a company has $25,000 in average inventory during a one-year period. To calculate days inventory outstanding, you will need to use the DIO formula.

• Regardless, a low day’s inventory outstanding is generally accepted as an indication that a company is able to quickly turn its inventory into sales.
• It considers the days inventory outstanding, days sales outstanding and days payable outstanding for computation.
• It’s a measure of how quickly your business turns over its inventory, which you can use to determine whether you need to adjust operations to receive products more quickly.
• If you have a high DIO measure, then your sales could be lagging, or you could be buying too much inventory at once.
• Use these two and put them into the formula, and you would have the company’s days inventory outstanding .

The point is, business operations in different industries vary, and to get a valid interpretation, you need to compare businesses in the same industry. Suppose Company A has a DIO of 50 days while Company B has a DIO of 250 days. Going by the rule of thumb, the automatic interpretation of this metric is that Company A is doing much better than Company B. A company with a low DIO is also less likely to get obsolete stock that eventually has to be written off.

In financial analysis, it is important to compare DIO with the DIO of similar companies within the same industry. For example, companies in the food industry generally have a DIO of around 6, while companies operating in the steel industry have an average DIO of 50. Therefore, comparing DIO between companies in the same industry offers a much better, more accurate and fair, basis for comparison.

While inventory turnover helps evaluate how quickly a company can sell its inventory, DIO helps determine the average time it takes for a company to turn its inventory into sales. Essentially, DIO is the inverse of inventory turnover in a particular period. One business you’re eyeing, Retail1, has inventory worth $500,000 and a cost of goods sold worth $3.5 million for the fiscal year 2020. The business exclusively handles finished products that are ready for sale, so it has no raw materials or products currently being manufactured.