Days of Inventory Outstanding

Days of Inventory Outstanding (DIO), also known as “days inventory”, is a financial metric that measures the average number of days a company holds inventory before selling it. This metric is used to evaluate the efficiency of a company’s inventory management.

The formula to calculate Days of Inventory Outstanding is:

Days of Inventory Outstanding = (Average Inventory / Cost of Goods Sold) * 365

Where:

– Average Inventory is the average value of inventory during the period being analyzed.
– Cost of Goods Sold (COGS) is the total cost of all goods sold during the same period.

A lower DIO is generally favorable as it indicates that a company is able to turn its inventory into sales more quickly. This can lead to lower storage costs and less risk of inventory obsolescence. However, a DIO that’s too low may indicate that the company does not have enough inventory to meet demand, which can lead to lost sales.

On the other hand, a higher DIO may indicate that a company is holding onto its inventory for too long before selling it, which can result in higher storage costs and an increased risk of inventory obsolescence.

As with any financial metric, the DIO should be used in conjunction with other metrics and it’s always useful to compare a company’s DIO with those of other companies in the same industry.