Days Inventory Outstanding

How is it calculated?

Days Inventory Outstanding = 365 / Inventory Turnover Ratio

Goal of the Ratio

The goal of this ratio is the same as the Inventory Turnover Ratio; however rather than expressing the ratio as how many times a borrower’s inventory turns over each year, the ratio is divided into 365 days to show how many days worth of inventory the borrower has on hand.  Many times this expression is much easier for people to grasp and understand even though the end goal of the ratio is the same as the Inventory Turnover Ratio.  

When is it used?

This is a typical ratio to use when a company’s business holds a lot of inventory.  Examples of businesses like this would be retailers or wholesalers.  

Rules of Thumb

There is no clear rule of thumb for this ratio as it varies considerably from industry to industry.  You best bet is to always view this ratio in relation to its peer averages.

Please note all ratios should be viewed in relation to industry norms to determine overall adequacy.

What changes in the ratio could mean:

Some example reasons why the Days Inventory Outstanding can change:

Reductions in Days Inventory Outstanding

1. Rising Revenue
2. Supply chain interruptions lead to lower inventory

Increasing Days Inventory Outstanding

1. Purchase additional inventory in anticipation of rising revenue
2. Adding a product line
3. Declining revenue

Other Relevant Terms

• Capital
• Balance Sheet
• Working Capital
• Inventory Turnover Ratio
• Return to Terminology Library