Financial metric · Earnings quality
Days Inventory Outstanding (DIO)
How many days, on average, inventory sits with the company before it is sold. A rising number means goods are selling more slowly.
How to calculate it
Inventory turnover = cost of revenue ÷ average inventoryDIO = 365 ÷ inventory turnover = average inventory ÷ cost of revenue × 365How to read it
- Slower inventory turnover often means weak demand or over-ordering. Excess stock may later be discounted or written down, which hits gross margin.
- Read it with gross margin. Inventory piling up while gross margin rises is a classic red flag, because leaving costs in inventory makes current profit look better.
Common pitfalls
- U.S. GAAP still allows LIFO (last in, first out), which IFRS and Chinese standards do not. In inflationary periods LIFO inventory is carried at old, low costs, which shortens DIO. Companies using LIFO disclose a LIFO reserve; add it back when comparing with FIFO peers.
- Deliberate stockpiling ahead of price increases, tariffs or product launches also lengthens DIO. Look for management's explanation and subsequent sales.
- Some inventories are meant to sit for years (aging whiskey, homebuilders' land, aircraft programs), so general rules of thumb do not apply.
- Like DSO, DIO is seasonal, so compare with the same period last year.
Industry differences
Grocers and restaurants turn inventory in days or weeks, industrial manufacturers in months, and homebuilders and aerospace programs over years.
Where to find it in a 10-K
Balance sheet 'Inventories' and income statement cost of revenue. The inventory note breaks out raw materials, work in progress and finished goods, and discloses LIFO reserves and write-downs.
U.S. vs. China reporting
Chinese standards prohibit LIFO, so A-share inventory figures are closer to current costs. When comparing a U.S. LIFO company with a Chinese or IFRS peer, adjust for the LIFO reserve first.