This week, we’re examining cash flow metrics. As the cannabis industry matures, additional financial metrics become important. One such metric is Days Inventory Outstanding (DIO), which provides insight into how efficiently companies manage their inventory. In this post, we’ll explore what DIO is, why it’s important, and how cannabis multi-state operators (MSOs) stack up against each other. Later this week, we will look at accounts payables and receivables.
What is Days Inventory Outstanding?
DIO measures the average days it takes a company to sell its entire inventory. It is calculated by comparing the average inventory to the cost of goods sold. A lower DIO indicates that a company is selling its inventory more quickly, signifying better operational efficiency and cash flow management. Remember when Canadian cannabis companies/LPs had too much inventory and had to destroy some? This metric would have warned investors that this was likely to happen.
Why is DIO Important?
Understanding DIO is essential for several reasons:
- Operational Efficiency: A low DIO indicates effective stock management, reducing carrying costs and potential obsolescence.
- Cash Flow Management: Efficient inventory turnover improves cash flow, allowing companies to reinvest in operations or pay down debt more quickly.
- Market Positioning: Companies with better inventory management may have a competitive edge, attracting investors and improving market perception.
- Performance Benchmarking: DIO allows shareholders to compare performance among peers, providing insights into industry best practices.
Ranking of MSOs by DIO
Below is the number of days each company takes to sell its inventory. A lower number is preferred, as it shows that the MSO is using its capital and inventory more efficiently.
How to Track This Ratio During Upcoming Earnings Season
If you hope to review this after each MSO’s earnings report, you will likely be disappointed. You will have to wait for a few days until systems like Capital IQ, Yahoo Finance, etc., update their earnings data. You will then have to calculate this ratio yourself. However, we will be doing this for our readers in the future after earnings and will share how companies are improving or falling back with their inventories.
Big Takeaway
Do you remember last week we shared an article about the current ratio? We shared how inventories are part of the current ratio. We also warned that one can’t pay their bills with inventories, so be careful not to put too much faith in a high current ratio. This is especially true of a company with low inventory turnover; in this case, the MSO likely has an overstated current ratio. For example, Canadian companies/LPs would have overstated current ratios before they destroyed their high inventories. Investors would have been warned if they saw high and increasing DIO ratios.
Check out our other blogs to help everyone prepare for earnings on topics like:
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