Days inventory outstanding

Days inventory outstanding is inventory divided by cost of sales for the period, multiplied by the number of days in the period. Cost of sales is the correct denominator because inventory is carried at cost, and dividing it by revenue would mix a cost figure with a selling price and understate the days by the gross margin.

It is the component of the cash conversion cycle most under management's control and the first place to look when a company claims a working capital improvement, because it is also the component with real operating consequences. Stock can always be cut. Whether it can be cut without losing sales, paying for expedited freight or straining a supplier is the question worth asking.

Comparability needs care. Seasonal businesses measured at a year end show a figure that has nothing to do with the annual average, and a US peer using LIFO carries cheap old cost layers so its days read low against an identical IFRS reporter on FIFO. Average or quarterly balances are the defence against the first, the LIFO reserve against the second.

A rising figure is worth two separate questions rather than one. It can mean deliberate stock building ahead of demand or a supply disruption, which are neutral or positive, or it can mean goods that are not selling, which eventually arrives as a write down to net realisable value.