Tuesday, August 12, 2014

Operating Performance Ratios : Cash Conversion Cycle ( Operating Cycle )

  
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Series : Ratio Analysis    (19 th Post)
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 Q Is the company generating enough cash on time , from the sales of  its inventory ?


This Cash Conversion Cycle or Operating Cycle is an indicator in number of days a company takes to receive its cash from the accounts receivable from the time purchase of its inventory.
Less Number of days means more Cash is available quickly for additional purchases or repayment of its loans.

Formula: Operating Cycle Days or Cash Conversion Cycle (CCC) =  DIO + DSO – DPO
                          DIO=Days Inventory Outstanding
                          DSO=Days Sales Outstanding
                          DPO=Days Payable Outstanding

DIO is calculated as :

1.    Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;
2.    Calculating the average inventory figure by adding the year's beginning (previous yearend amount) and ending inventory figure (both are in the balance sheet) and dividing by 2 to obtain an average amount of inventory for any given year; and
3.   Dividing the average inventory figure by the cost of sales per day figure.

DSO is calculated as :
  1. Dividing net sales (income statement) by 365 to get net sales per day figure;
  2. Calculating the average accounts receivable figure by adding the year's beginning (previous yearend amount) and ending accounts receivable amount (both figures are in the balance sheet) and dividing by 2 to obtain an average amount of accounts receivable for any given year; and
  3. Dividing the average accounts receivable figure by the net sales per day figure.
DPO is calculated as :
  1. Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;
  2. Calculating the average accounts payable figure by adding the year's beginning (previous yearend amount) and ending accounts payable amount (both figures are in the balance sheet), and dividing by 2 to get an average accounts payable amount for any given year; and
Dividing the average accounts payable figure by the cost of sales per day figure.







Next Post on Ratio Analysis:   Cash Flow Indicator Ratios 

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In my quest for learning value investing I came acrros this interesting article and thought would like to share this with the community
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