Days of Inventory Outstanding | (Formula, Examples) | Calculation - YouTube

Hello everyone welcome to the channel wallstreetmojo friends today we're going to learn a concept

of Days of inventory outstanding a very fantastic concept to get into because this helps in

in in in terms of deciding various things in the company I mean let's see if it's basically

of financial measure it tells us the investor how good the company is handling its inventory

know in this particular tutorial will look at the financial measures in detail so let's

get into that you can say the another name of the days of inventory outstanding that

is DIO is also called as the days of sales of inventory now days of inventory outstanding

it tells us how many days a company takes to turn its inventory into the sales for

example let's look at the graph over here and Colgates days inventory outstanding has

been stable over the year and it's currently closed enough to 70. 66 days however when

we compare this with the Procter and gamble that is PNG we know that PNG days inventory

outstanding has been decreasing over the years and it is currently to 52.39 so post will

look at the formula and then will try and understand it in more further way I mean if

you try to interpret the days of sales outstanding interpretation I'm just trying to tell

you that what is the cash cycle exactly so cash cycle is DSO that is a days of the

sales outstanding you can say or I'll just start with the cash conversion cycle cash

conversion cycle that is the days cash conversion ok that will be equal to will have 4 element

in this first days of sales outstanding OK will add something to it and we'll add something

from here so will add days of inventory will add what days of inventory and we will deduct

if any that days payable outstanding so this is what we are going to deduct over

here and which will result in give us the answer the cash conversion cycle there are

three component in the cash conversion cycle has you can see the first one is it is the Days of

sales inventory the second the other two's are the days of the sales outstanding

in the days payable outstanding know that means we can easily say that the days of the

sales inventory is one of the stages of the cash conversion cycle which translates the

raw material into the cash now in the formula we can see that the inventory is divided

by the cost of goods sold and we we can also say that this is basically helps us to understand

the proportion of the raw material in the total cost of sales so then we multiply that

proportion by 365 days which allows us to see the proportion in terms of the days

so let's take a very easy example to illustrate how the whole thing works let's get into the

example let's say there is a company Zing which has an Inventory of the inventory is close

enough to 60000 so i am just writing over here as inventory and it has the inventory closing

to 60000 the cost of sales is close enough to in the neighborhood of let's say 3 lakh

ok so find out is of inventory outstanding of company Zing. Now this is a very simple

days inventory outstanding example all we need to do is just to put in the figures of

the formula so here's the formula the Days of Inventory the days of inventory outstanding will be

equal to will say the inventory divide by the cost the days of the sales outstanding

is going to be inventory divided by the cost the cost will be the cost of sales so this

forms our formula now over here to put the numbers and will will get into the answer

before that you need to multiply this whole thing into 365 don't forget to do this so

we hear our days of sales is going to be 60000 that is our inventory cost of sales is 300000

into will have to do 365 so the final answer that we are going to receive for the days of inventory

is going to be 73 days ok so this is how you calculate that means over here it takes

73 days to translate the raw materials into the cash for the company Zing now how do you interpret

DIO its its called DIO as an image in a short way as an investor so first of all the days

of inventory outstanding is a measurement of the companies performing in terms of inventory

management so if the days of inventory outstanding of a company are low It means two things first

low days of inventory outstanding means that the company has been effectively using the inventory

and secondly low days of inventory outstanding also mean that the company has not been store

inventory for the required demand of the company has been writing down the values of the inventory

on the other hand we need to look at the high days inventory outstanding as well and the high

is inventory outstanding also means a two things high days of inventory outstanding means

that the company has not been able to translate the inventory into sales quickly it also means

that the company has been keeping obsulte inventory as well since both the low and the high days

inventory outstanding can be interpret separately its important for investor to follow few steps

while interpreting the low or high days inventory outstanding first of all investors should

also look at the other companies in the similar industry to see whether the DIO is also low

or high in that in the case of the come off of the Other companies in a similar industry

if yes then take the next step and if not then investor should look other financial ratio

of the same company first. Now in the first step the similar result then the investor should

look at the other companies in the different industry to be sure about it. I mean she can gather

the information of other companies in the other industry and then compute the DIO to find

out whether the similar company in the other industry are also providing the similar results.

The point of all of this is just be ensured whether the company in a particular industry is doing

good or not so looking at the different companies in the same industry and different companies

another different industry will give you a very Holistic perspective to the investor

lastly investors should look at the other two ratios of the cash conversion cycle as

well as the other financial ratio of the company as she wants to invest in what statements

to look at to find out the days of industry in inventory outstanding if you are a new

investor it may seem difficult for you to find out the inventory and the cost of sales

that is all the cost of good sold that's why it is important no certain aspects of days

of inventory sales while calculating the days of inventory outstanding we usually take the

ending inventory or else we can also take the average of the beginning and ending inventory

so average to find out the average all we need to do is just to add up the beginning

inventory and the ending inventory and then we just need to divide total by 2 so to find

out the inventory average ending we need to look at the balance sheet and you will see

something like closing stock in the balance sheet so for cost of goods sold you need to

pull out the income statement of the company and then you need to see the column under

the scenes you will find the item of cost of goods sold the difference between the scenes

in the cost of good sold is the gross profit which will invention in the income SSI use

this to and and put into the formula and you would have companies days inventory outstanding

let's get into Sector base example lets say will take an example of a Airline Sector navel show

you inventory days outstanding of top companies in the airlines sector as you can see there

a couple of airlines American Airline group, Alaska air group, Azure China Eastern Airline,

Copa Holdings, The Delta Airlines, GOI Intelligent Airlines, JetBlue, Latam, Southwest, Ryanair,

United Continental holdings China Southern Airlines you can see the days of the inventory outstanding

over here for each of this company inventory processing Days of the Airline sector is less

than 1 month for most of the companies as you can see is 22, 9, 6, 17, 20,18 as you can see

in majority it is less than 1 one month I am in Ryanair Holdings Ryanair Holdings over here

I'm in has the lowest inventory processing days that is close enough 0.33 that's really

good that's not even one day where is for the United Continental Holdings it is it is

close enough to 23.33 that is close enough to 24 days now let's get into the example of automobile

sector and I'll show you some of the example for automobile sector that what exactly is the

condition over there, now as you can see you were here it is this is the complete list of the

automobile sector Ford Motors, Fiat, General Motors GM, Honda Motors, Ferrari, Toyota, Tesla and Tata

Motors I think everyone knows nowadays what Tesla is who is Elon Musk one of the great

entrepreneur of of the history now talking about on this particular note you can see

the days of inventory sales has for some company is greater than one month that is fiat has

44 days and in terms of the loan number it is 24 days for 4 so in the highest is 113

so if it is blocked more it's not good ok. See the more it is blocked the more it's going to create

problem ok this is example of the discount store as you can see this detail of Burlington

stores, Costco wholesale, Dollar general, Dollar Tree stores, Target and Walmart stores. Now

the days of inventory outstanding for all of this companies as you can see it is closed

after more than 2 months in majority the company is lowest is for Costco that is close enough to

30 days while the highest is 82.24 Burlington stores so the Burlington stores is the highest

Inventory of days close enough to 83 days while Walmart stores has closed in up to 44.21

Now lets go into the example of Oil and Gas sector and see what goes on about this particular scenario

now as you can see this is the complete list of the Oil and Gas sector I'm in this is it

the list of the top companies in the old Gas sector along with its market cap in inventory

days of sales outstanding Phillips, CNOOC, EOG, Occidental Petroleum, Canadian Natural and so on and so

forth like Apache has this other list i mean the inventory days of outstanding is varid

for oil and gas sector like one hand there is Apache that has inventory processing

days of close enough to how much it is 4 months 112.6 and that's enough to close to 4 months

and ConocoPhillips has Inventory of inventory of days sales outstanding is less than 1 month

you can see how there is a huge level of difference of inventory of days sales outstanding in various

companies and in the different industry so the case about the working capital

As an investor you also need to keep in mind that whether the company has required working capital

at any given moment or not and to do that you can also look at the inventory outstanding

lets say a company has a low DIO meaning it takes a longer time to transfer inventory into

cash. Now what is the days of the inventory outstanding decrease, that means a days

it takes to turn in the inventory into cash also decreases in a nutshell it means the

company would have more cash, Since Dio gets faster, so as a result the working capital of

the company will also increase on the other hand if the DIO increases the days it takes

to turn inventory into cash also increases in a nutshell the company would have less

cash that means the condition of working capital of the company will also deteriorate. I hope you

have got a complete idea about what goes in and what goes out in this particular ratio.

Thank You!