Using ratios to analyse companies

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9. Debt collection

Definition: Trade debtors divided by sales, multiplied by 365

Significance:

This shows how many days on average it takes the company to get paid for what it sells. Obviously, the lower the better. An abnormally high figure suggests inefficiency, potential bad debts, window-dressing of the sales figures, or deliberate bullying by large customers trying to improve their own cash management. None of that is good news.

Example

Debt collection calculator Trade debtors £  m Sales £  m   Debt collection:       days

Yardstick:

Cash businesses, including most retailers, should have very low debt collection multiples, because they get their money at the same time as they sell the goods. Typical target for other non-cash businesses will be 50-70 days.

1. Why bother with ratios? 2. A word of warning 3. The P&L and the balance sheet 4. Grouping the ratios 5. Profit margin 6. Return on capital employed (ROCE) 7. Sales as a multiple of capital employed 8. Stockturn 9. Debt collection 10. Payment of trade creditors 11. Cash-to-cash cycle 12. Gearing 13. Interest cover 14. Current ratio 15. Quick ratio (acid test) 16. Earnings ratios 17. Dividend ratios 18. Other ratios 19. Sources of information 20. Conclusion

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