Definition:

Days of Inventory Outstanding (DIO) is a financial metric that measures the average number of days a company takes to sell its entire inventory during a specific period.

Formula:

DIO = (Average Inventory / Cost of Goods Sold) × 365

How to use the metric:

DIO is used to assess the efficiency of a company's inventory management. A lower DIO indicates that a company is able to sell its inventory quickly, which can be a sign of strong sales performance or effective inventory management. Conversely, a higher DIO may suggest overstocking, obsolescence, or weaker sales.

Limitations:

DIO does not account for seasonal variations in inventory levels or sales, which can skew the metric. It also does not consider the quality or condition of the inventory, which can impact its salability. Additionally, DIO is most useful when compared to industry averages or historical data within the same company.

Applies to:

DIO is particularly relevant in industries with significant inventory holdings, such as retail, manufacturing, and wholesale. These industries rely heavily on inventory turnover to drive sales and profitability.

Doesn't apply to:

DIO is less applicable to service-based industries or those with minimal inventory, such as consulting, software, or financial services, where inventory management is not a primary concern.

Summary:

Days of Inventory Outstanding is a key metric for evaluating how efficiently a company manages its inventory. While it provides valuable insights into inventory turnover, it should be used in conjunction with other financial metrics and industry benchmarks to gain a comprehensive understanding of a company's operational performance.