Days of Inventory Outstanding is the average number of days a company holds inventory before turning it into sales.
Indicating the liquidity of the inventory, the figure represents how many days a company’s current stock of inventory will last. Generally, a lower DIO is preferred as it indicates a shorter duration to clear off the inventory, though the average DSI varies from one industry to another.
DIO is a metric that analysts use to determine the efficiency of sales. A smaller number indicates that a company is more efficiently and frequently selling off its inventory, which means rapid turnover leading to the potential for higher profits (assuming that sales are being made in profit). However, this number should be looked upon cautiously as it often lacks context. DIO tends to vary greatly among industries depending on various factors like product type and business model. Therefore, it is important to compare the value among the same sector peer companies. Companies in the technology, automobile, and furniture sectors can afford to hold on to their inventories for long, but those in the business of perishable or fast-moving consumer goods (FMCG) cannot. Therefore, sector-specific comparisons should be made for DIO values.