Month: December 2010 (Page 4)

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.

5. Backlog

Some companies will have a backlog of orders. The easiest way to find this discussion is by searching for ‘backlog’ using your browser or reader.

Having a backlog is not necessarily a bad thing. In fact, it is sometimes a great thing as it shows that customers really want the company’s products and they are willing to wait for them. It also may show that revenue growth is being controlled to flatten out peaks and valleys – this is often a good thing.

Backlog often means that customers are buying faster than the company can process and ship the product. If the company is cyclical in its orders than perhaps they have decided to only have a certain number of personnel shipping orders. If that capacity is exceeded occasionally then the customer will have to wait. This often means that the company is able to control costs.

It is possible though that backlog that continues to grow from year to year is a bad thing. This could be a sign that your company is sacrificing customer satisfaction for cost controls and they are not staffing correctly.

Changes to backlog relative to the size of the company should cause concern. Something has changed in the operations of the company if this number doesn’t stay relatively static. Make sure you are comfortable with the company’s description of the change.

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)

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)