Explanation
Accounts Receivable are created when a customer has received a product but has not yet paid for that product. Accounts receivable can be measured by Days Sales Outstanding:
Days Sales Outstanding = Account Receivable/Revenue x Days in Period.
In Ben Grahams calculation of liquidation value, accounts receivable are only considered to be worth 75% of book value:
Liquidation value = Cash and cash equivalents + (0.75 * accounts receivable) + (0.5 * inventory) - Total Liabilities Beaware
Net receivables tells us a great deal about the different competitors in the same industry. In competitive industries, some attempt to gain advantage by offering better credit terms, causing increase in sales and receivables.
If company consistently shows lower % Net receivables to gross sales than competitors, then it usually has some kind of competitive advantage which requires further digging.
Average Days Sales Outstanding is a good indicator for measuring a companys sales channel and customers. A company may book great revenue and earnings growth but never receive payment from their customers. This may force a write-off in the future and depress future earnings.
Related Terms
Days Sales Outstanding,
Total Current Assets
European Shorting
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