The skinny on data ratios
Tom Contiliano, head of financial operation for Bloomberg News, teaches journalist in-depth accounting.
Getting up early on a Friday morning is rough. Leaving your bed for a three-hour class on accounting at the very end of the week, well that’s almost impossible.
But the early risers (and that included me) at this year’s SABEW conference were in for a real treat. This morning we spent hours learning how to sort through in-depth accounting techniques with Tom Contiliano, head of internal financial operations for Bloomberg News.
Contiliano is one of those teachers that can make the most complex subjects easy to digest. And that’s exactly what he did when discussing ratios, an area that can quickly become overwhelming for many business journalists.
After looking at a series of ratios alone, we determined the companies that recorded specific percentages. A company moving inventory quickly, for example, could indicate a food services entity like McDonald’s. If a company recodes a high “R&D to Sales” ratio (the amount they spend to develop products for the future) could indicate a pharma entity like Merk.
Contiliano said reporters most commonly focus on the areas that tell you the least about a company: earnings and sales growth. To really grasp what’s happening with a company, run a series of ratios that will take you deeper inside.
The “Current Ratio” details if a company has a tons of cash stocked up. If you see this, dig deeper to find out why.
“When you see a high current ratio, news will follow,” Contiliano said. “There is no reason why a company should be sitting on that much cash.”
Here’s a list of ratios that Contiliano suggests reporters keep an eye on:
Net Income Growth – Bottom line growth. (Change in Net Income/Year-Ago Net Income multiplied by 100)
Sales Growth – Top line growth. (Change in Sales/Year-Ago Sales multiplied by 100)
Gross Margin – Plain and simple: Is the main product/service profitable? (Sales – COGS/Sales multipled by 100)
Selling & Admin Exp to Sales – How lean is the company’s overhead? (S&A Expenses/Sales multiplied by 100)
Days Inventory – How long is stuff sitting in the warehouse? ((1/ (COGS/Inventory) multiplied by 365)
Days Receivable – Are their customers paying up? (1/ (Sales/Accounts Receivable) multiplied by 365)
Days Payable – How quickly do they pay their bills? (1/ (Purchases/Average Accounts Payable) multiplied by 365)
Current Ratio – Are they sitting on a lot of liquidity? (Current Assets/Current Liabilities)
LTD to Total Capital – Size of company mortgage. (LTD/ ST Borrow + STD + LTD +Pref Stock multiplied by 100)
CFO to Net Income – Is cash coming in/going out similar to earnings/losses? (Operating Cash Flows/Net Income)
Cap Ex to Total Assets – Building the business? (Cap Ex/Total Assets)
R&D to Sales – What are they spending on the next generation of products? (R&D Costs/Sales multiplied by 100)
