The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)

This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

4. DSO

DSO stands for Days Sales Outstanding. Not all companies will report DSO but if they do, you can usually find it by searching for ‘DSO’, ‘Days Sales’, or ‘Receivables’ in your reader or browser.

In nearly every case, you just want to make sure that this number doesn’t get dramatically larger than it was previously. DSO that is increasing means that the company’s customers are, on average, taking longer to pay for their purchases. This means that your company’s cash is being tied up paying bills and salaries while the check is in the mail from the customers.

You want your company to constantly be working to shrink the DSO metric. A large and increasing DSO can mean that the company is hiding something bad and it is heading into trouble. You may want to liquidate your holdings if the DSO is going up dramatically and you don’t think it is for a good reason.

In general, it is an excellent combination if revenue (sales) and net profit are going up at 10% and the DSO is decreasing.

Here are the links to all 9 posts of the series:

  1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
  2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
  3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
  4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
  5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
  6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
  7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
  8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
  9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

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