Is a high or low DIO better?

Lower usually means less cash tied up and less risk of goods going out of date, but it can also mean a business that cannot fill orders. Higher can mean a deliberate position, such as buying before a price rise or stocking up ahead of a season, or it can mean goods that have stopped selling. Comparing the figure with the same business in earlier periods and with its stock ageing is more useful than a sector average.

What is the difference between DIO and inventory turnover?

They are the same measure expressed differently. Inventory turnover says how many times a year the stock is sold through, as cost of sales divided by stock. DIO converts that into a number of days, by dividing 365 by the turnover. A business turning its stock five times a year has about 73 inventory days. Lenders tend to speak in days, because days can be added to debtor days and compared with credit terms.

Why do inventory days use cost of sales and not revenue?

Because stock is carried in the accounts at cost, and cost of sales is measured on the same basis. Revenue includes the margin, so using it understates the days and makes a business with high margins look quicker than it is. Some published comparisons do use revenue where cost of sales is not disclosed. The method matters less than consistency, but the two versions cannot be compared with each other.

Can inventory days fall while a business gets worse?

Yes. A write-down reduces stock and, where it goes through cost of sales, raises the figure it is divided by, so the days fall without a single sale. Clearing old stock at heavy discounts does the same while cutting margin. A year in which days improve and margin drops needs explaining. A lender looks at the movement in the stock provision and the gross margin beside the days before treating the improvement as good news.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Inventory Days (DIO): a Worked Example

The number can improve on the day the stock is thrown away.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A lender uses inventory days to ask how much of the balance sheet will turn into cash, and how soon. Stock divided by daily cost of sales gives the average wait before goods sell, but the average hides the answer. A camping-gear wholesaler at 120 days holds lines that sell within weeks beside lines unsold after a year. When it finally writes off the oldest stock, the figure drops to 90 with no extra sale made. That is why the trend is only a prompt, and the ageing report does the work. DIO, days inventory outstanding, is the same ratio.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

Open The Number →

PART OF Credit Analysis for Beginners

// 01 — WHY A LENDER WATCHES STOCK

Stock is cash that has been spent and not yet earned back. Every extra day of it has to be funded, usually by the overdraft or by suppliers. And of the current assets on a trading balance sheet, it needs the most judgement to value: receivables are owed by named customers, while stock is worth whatever someone will pay for it, on a day that may come well after the fashion, the season or the model has moved on.

The accounts give the lender limited help. Stock is carried at cost unless its net realisable value is lower, and the assessment is made by management, generally item by item or across closely related items. Under FRS 102, which most UK mid-market groups use, the test is framed as estimated selling price less costs to complete and sell, and the effect is much the same. A rising figure may mean nothing is wrong. But until a write-down is taken, the balance sheet cannot show it.

// 02 — HOW IT IS CALCULATED

Inventory days = stock ÷ cost of sales × 365

Stock turn = cost of sales ÷ stock

Inventory days = 365 ÷ stock turn

Average stock = (opening + closing) ÷ 2

Cost of sales is the right base because stock is carried at cost; dividing by revenue mixes cost with margin and gives a lower number. Closing stock tells you where the business stands at the balance date, and an average smooths the year. Neither copes with a season: a retailer's June stock says little about its October peak, so a lender with monthly figures reads the months. The site's worked cycle shows how the days convert into funding.

Check what is in the balance. A manufacturer's stock splits into raw materials, work in progress and finished goods, which carry very different risk. Goods in transit may belong to the business before they arrive, depending on the shipping terms. Stock held on consignment may not belong to it at all, and stock supplied under retention of title may not be free to sell for the lender's benefit.

// 03 — THE EXAMPLE

A wholesaler of camping and hiking gear, constructed for this page like every figure in it, has flat sales and rising stock. It earns EBITDA of US$2.6m. Its management says it has been buying ahead of a price rise.

US$m Stock Cost of sales Days

Two years ago 3.40 18.0 69

Last year 4.50 18.4 89

This year 6.00 18.2 120

One day of cost of sales: 18.2 ÷ 365 = about US$50,000

Stock above the old 69 days: 6.00 − 3.44 = US$2.56m

Stock ageing, at cost

Under six months 3.30 3.30 ÷ 18.2 × 365 = 66 days

Six to twelve months 1.50

Over twelve months 1.20

If the oldest 1.20 is written off through cost of sales:

Stock 6.00 − 1.20 = 4.80

Cost of sales 18.20 + 1.20 = 19.40

Inventory days 4.80 ÷ 19.40 × 365 = 90

EBITDA 2.60 − 1.20 = 1.40

The ageing tests management's explanation. Buying ahead of a price rise would show up as recent stock, and US$2.7m of this is more than six months old. Stock under six months old is 66 days of cost of sales, close to where the business stood two years ago. The rest is the problem. The bottom lines show the trap. The days improve by 30 with nothing sold, and EBITDA nearly halves. A full write-off is the example's assumption; a real one would be set line by line. None of these levels is a market norm.

// 04 — HOW IT DIFFERS FROM THE FIGURES BESIDE IT

Stock turn is the same fact stated the other way up: 120 days is about three turns a year. Debtor days measure a claim on a named customer and are based on revenue; creditor days measure who is funding the stock. Together the three make up the cash conversion cycle. A wholesaler's inventory days also need reading beside its gross margin, because discounting old stock lifts turnover and lowers margin at the same time.

Inventory days describe speed and say nothing directly of value. Slow-moving stock is where a lender turns speed into a figure it would lend against, and a borrowing base is the mechanism that applies it. A lender's advance against stock is usually well below cost, for the reason the example shows.

DEFINED IN ONE PARAGRAPH → · SLOW-MOVING STOCK → · WORKING CAPITAL CASE STUDY →

// 05 — WHERE IT DECIDES A FILE

Inventory days are often the reason for a request. A borrower asks for a larger overdraft and describes it as growth, and the days show the facility would really be financing goods that have not sold. A lender then asks for the ageing by product line, the sales after balance date of what was held at balance date, and the most recent stocktake. It may also ask how the provision was calculated and whether it has moved with the ageing.

The answer shapes the facility as well as the decision. A temporary rise for a confirmed order suits a temporary limit, repaid as the goods sell (temporary or permanent working capital). A rise made up of old lines suggests an earnings problem not yet reported, and a lender would rather reckon with the write-down now than discover it in the audited accounts.

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Accounting Standards Board, AASB 102 Inventories, the Australian text of IAS 2 — paragraphs 9, 28 and 29 — Inventories are measured at the lower of cost and net realisable value, and write-downs are usually made item by item — section 01.
Financial Reporting Council, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, September 2024 edition — paragraph 13.4 — Inventories are measured at the lower of cost and estimated selling price less costs to complete and sell — section 01.

// QUESTIONS PEOPLE ASK

Is a high or low DIO better?: Lower usually means less cash tied up and less risk of goods going out of date, but it can also mean a business that cannot fill orders. Higher can mean a deliberate position, such as buying before a price rise or stocking up ahead of a season, or it can mean goods that have stopped selling. Comparing the figure with the same business in earlier periods and with its stock ageing is more useful than a sector average.
What is the difference between DIO and inventory turnover?: They are the same measure expressed differently. Inventory turnover says how many times a year the stock is sold through, as cost of sales divided by stock. DIO converts that into a number of days, by dividing 365 by the turnover. A business turning its stock five times a year has about 73 inventory days. Lenders tend to speak in days, because days can be added to debtor days and compared with credit terms.
Why do inventory days use cost of sales and not revenue?: Because stock is carried in the accounts at cost, and cost of sales is measured on the same basis. Revenue includes the margin, so using it understates the days and makes a business with high margins look quicker than it is. Some published comparisons do use revenue where cost of sales is not disclosed. The method matters less than consistency, but the two versions cannot be compared with each other.
Can inventory days fall while a business gets worse?: Yes. A write-down reduces stock and, where it goes through cost of sales, raises the figure it is divided by, so the days fall without a single sale. Clearing old stock at heavy discounts does the same while cutting margin. A year in which days improve and margin drops needs explaining. A lender looks at the movement in the stock provision and the gross margin beside the days before treating the improvement as good news.

// NEXT TO IT

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THE CALL · THE LOAN · CAPACITY

A manufacturer wants a five-year loan for a machine. Its own appraisal shows a strongly positive net present value, but the machine saves little cash in years one to three and a lot in years four to eight.

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THE READING ROOMIN ONE PARAGRAPHInventory days (DIO) What are inventory days (DIO), and why does a lender watch them?