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JTrain --

<<I'm confused by what he (TMFTemplr) means in the DSO ratio calculation by "Current accounts receivable". Does he mean the entry of the same name on the balance sheet, or the A/R Turnover he calculated the paragraph before? I would think the Turnover, since he said it was needed to calculate the DSO.>>

Here's my understanding, based on various snippets I've read in Fooldom:

A/R Turnover = Last 4 Quarters' Sales / Current Accounts Receivable

Days Sales Outstanding (DSO): Days sales outstanding is a measure of how many days worth of sales the current accounts receivable represents.

DSO: Days Sales Outstanding measures the company's control on receivables. A company whose DSO is 50 takes 50 days to collect accounts receivable. Smaller numbers mean the company can use that money---a good thing.

Days Sales Outstanding (DSO)
(From http://www.fool.com/portfolios/rulemaker/1999/rulemaker991102.htm)

On a quarterly basis, DSO is calculated using the following formula: Accounts receivable / (Sales / 90). If you want to calculate it for the year, you can substitute 360 for 90 in that equation. I like to see this figure as low as possible. A low figure means that the company collects its outstanding receivables quickly, which means that it's not giving out interest free loans to its customers for long periods of time.

Let's calculate this number for the second quarter of this year for both Pfizer and Warner-Lambert:

For..................Pfizer.....Warner-Lambert
Accounts Receivable...3,396.....1,949
Sales.................3,779.....3,151

For Pfizer we take 3,779 and divide it by 90, getting 41.99. We then take that figure and divide it into 3,396. The result is that it takes Pfizer 81 days to collect its outstanding accounts receivable, which is higher than any other pharmaceutical company I've studied. If you do this same calculation for
Warner-Lambert, you'll get a result of 56 days. Looking at those numbers, I'd much rather owe money to Pfizer than Warner-Lambert, as Pfizer would give me 25 extra days to pay.

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