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Days inventory outstanding definition

Description

Days inventory outstanding shows the number of days that it is needed for the company to sell out stock. This ratio is similar to the inventory turnover ratio, only it provides information on company’s stock level in days but not in times. Data needed to calculate this ratio is collected from balance sheet and income statement.

This ratio is important for company’s owners as it shows how effectively their assets are used in a form of inventory. In order to get a more precise value of the ratio using average inventory, it is better instead of inventory at the end of the period.

Norms and limitations

There is no general norm for the DIO ratio. It should be compared with the ratio values of the same industry.

A high DIO means that stocks are being sold out too slow. That indicates an ineffective management at the inventory level. The high value of the ratio might also show the risk of products obsolescence. If the value is very low it means that the possibility to run out of stock might occur.

Formula

Cost of goods sold (COGS, Cost of sales) is the cost that goes directly into creating the products that a company sells.

Inventory is an important part of assets that consists of these three parts: raw materials, work-in-process goods and finished goods.