Evaluating Investment Mgmt: Working Capital Ratios

Question 1

Sales per day

Answer 1

Revenue / 360

Question 2

COGS per day

Answer 2

COGS / 360

Question 3

AR days
Days Receivables Outstanding DRO
Days Sales Outstanding DSO

Answer 3

AR / sales per day

360 / AR turnover

AR turnover should be higher; Want AR days, DRO, DSO to be smaller; collect cash faster
Or credit sales are decreasing; sales might be decreasing

Question 4

Inventory days

Days Inventory Outstanding DSO

Answer 4

Inventory / COGS per day

360 / inventory turnover

Want this to be lower
A decrease could also mean a loss of sales; less inventory, less goods to sell.

Question 5

AP days
Days Payable
Days Payable Outstanding DPO

Answer 5

AP / COGS per day

360 / AP turnover

Want this to be higher; more days of not using your own cash.
Or the firm is in financial distress; taking longer to pay off credit

Question 6

AR Turnover

Answer 6

Credit Sales / Average AR

A measure of credit quality; the higher the ratio, the faster AR is converted to cash; want this to be higher

AR turnover = 5, (AR is converted 5x)

Question 7

Inventory turnover

Answer 7

COGS / average inventory

Measures how quickly inventory is selling; want this to be higher

Question 8

AP turnover

Answer 8

COGS / average AP

Want this to be lower; use other people’s money for a longer time; AP is interest-free debt.