Wednesday, September 19, 2007

Days Sales Outstanding is an Outstanding Financial Ratio

A handy tool for many financial analysts and investors is the Days Sales Outstanding ratio. It's a good financial tool for deciding how effective a firm is at collecting payments. We can find out how long it takes our favorite companies to collect payments. Grab your favorite companies balance sheet and income statement. The way to calculate it is with the following equation:

Let's take a quick look at a real company and apply it.

Target (Stock Symbol TGT) is a major retailer with millions in sales. Lets see how well they are at collecting those payments for 2006.

Receivables/(Annual Sales /365) =
$6194 million / ($57878 mil / 365) =
39.1 days

Now lets compare that to 2005:
Receivables/(Annual Sales /365) =
$5666 million / ($51271 mil / 365) =
40.3 days

That's not a very significant change. However, if we saw a change in collection period of 10 or more days, investors might feel otherwise. This ratio is also good to use in comparison shopping. You can compare the Days Sales Outstanding ratio with other retailers, for example.

See you tomorrow. Thanks for visiting.
----------Sincerely, Trevor.
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