Analysis of Enterprise Operating Capability - World Credit Organization
3.11 Analysis of business operation capabilities
Operation capability refers to the operation capability of the enterprise, that is, the ability of the enterprise to use various assets to earn profits. The following introduces several financial ratios that reflect the operating capabilities of enterprises.
1. Bad debt rate
Bad debt rate= |
Bad debt loss |
×100% |
Sales revenue |
or
|
Bad debt rate= |
Bad debt loss |
×100% |
Accounts Receivable |
Accounts receivable = sales revenue - cash and spot sales - cash discount and sales discount, that is, the total amount of external credit sales of the enterprise. (Note: The difference between the amount of accounts receivable and the balance of accounts receivable)
Bad debt losses are not the provision for bad debts, but the uncollectible accounts receivable actually incurred by the enterprise or assessed by the enterprise. The assessment method of bad debts should generally be stipulated by the board of directors or relevant departments, and such regulations should generally remain unchanged for a long time, otherwise, no meaningful comparison can be made.
This ratio reflects the percentage of uncollectible bad debts in the company's sales (accounts receivable) in a certain accounting period. Of course, the lower the indicator, the better.
2. The average days of collection of accounts receivable (DSO)
DSO is the abbreviation of days sales outstanding in English, translated as "the average days of collection of accounts receivable".
Average collection days of annual accounts receivable= |
Accounts receivable balance at the end of the year |
×365 days |
Annual sales |
You can also calculate the average recovery days of accounts receivable according to a certain period, the formula is as follows:
Average collection days of accounts receivable= |
Accounts Receivable Balance |
×The number of days at this time |
Sales during this period |
You can also calculate the average recovery days of accounts receivable of a certain customer, the formula is as follows:
Average collection days of annual accounts receivable= |
A customer's annual credit balance |
×365 days |
Annual purchase amount of a certain customer |
Case, the following is a company's accounts receivable balance and sales from July to December 2007:
|
month |
7 |
8 |
9 |
10 |
11 |
12 |
Total |
Total sales (10,000 yuan) |
17 |
28 |
39 |
50 |
61 |
72 |
267 |
Accounts Receivable Balance |
5 |
4 |
6 |
7 |
9 |
8 |
|
Number of days |
31 |
31 |
30 |
31 |
30 |
31 |
184 |
The DSO for the second half of the year is:
|
Average collection days of accounts receivable= |
8 |
×184 |
=5.5 days |
267 |
The DSO for September is:
|
Average collection days of accounts receivable= |
6 |
×30 |
=4.6 days |
39 |
DSO for the fourth quarter is:
|
Average collection days of accounts receivable= |
8 |
×92 |
=4 days |
50+61+72 |
3. Inventory turnover rate and average inventory turnover days
Inventory turnover= |
Cost of goods sold |
times |
Average Inventory Balance |
Average inventory turnover days= |
365 |
|
Inventory Turnover |
In the formula: cost of goods sold refers to the accumulated manufacturing cost or purchase price cost of sold goods within a fiscal year.
Average balance of inventory = (balance at the beginning of the year + balance at the end of the year) ÷ 2
Just as accounts receivable turnover and days outstanding reflect the liquidity of accounts receivable, inventory turnover and days outstanding reflect the liquidity of inventory. If cost of goods sold is not known, net sales can be used instead. Although this result is not as accurate as the original one, it is easier to calculate. At this time, the same standard needs to be used in all calculations to ensure comparability when comparing inventory turnover ratios in different periods.
Fourth, inventory to working capital ratio
Inventory to working capital ratio= |
Stock |
×100% |
Working Capital |
The ratio of inventory to working capital shows the financing ability of the company to purchase inventory and whether the company has sufficient funds to purchase inventory. It is generally believed that this ratio should be less than 100%. If this ratio is greater than 100%, it means that the amount of inventory is too large compared to the financial resources of the enterprise. There are only two possibilities for this ratio to exceed 100%, and the analyst should pay special attention, because both of these situations are very dangerous.
1. The company holds a large amount of unsalable or obsolete inventory. Although the company's current ratio is high, the inventory turnover rate is very low.
2. The enterprise underinvests in the existing transaction, the essence of which is that the enterprise does not have enough working capital to support the existing transaction. In this case, although the company's inventory turnover rate is high, the current ratio is very low.The above content is excerpted from "ICE8000 Credit Investigation, Analysis, and Rating" (written by Fang Bangjian, free to use, but please indicate the source)