3 key financial metrics reporters shouldn’t miss

December 14, 2016

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Photo "The Market" by Iman Mosaad, Creative Commons Flickr user under 2.0 Generic (CC BY 2.0) license, cropped
Photo "The Market" by Iman Mosaad, Creative Commons Flickr user under 2.0 Generic (CC BY 2.0) license, cropped

If you’re writing about a corporation, chances are you look for financial statements. Most reporters will note revenue and earnings and be satisfied, but they lose amazing opportunities for insight and story ideas. Here are three metrics that have illuminated and even opened stories in the past for me. You may not find all for each company, but searching a PDF or HTML statement is worth the time.

Days Sales Outstanding

Also known as DSO, days sales outstanding measures how quickly on the average a company receives payment after making a sale. For any given financial period, divide the closing accounts receivable amount by net credit sales for the period and then multiply by 365 days. The bigger the number, the longer the wait to get paid and potentially the less stable the company’s finances. The business may have poor operational control over collecting payment or its customers might be financially unstable.

If a company doesn’t directly report the number, you may still be able to find it. Accounts receivable comes from the balance sheet. Sales come from the income statement. Companies rarely disclose what percentage of total sales are credit. You could try an approximation by dividing accounts receivable by total sales. Depending on the nature of the company, there may be little in non-credit sales. Or you can search for the company name and the term DSO; you may find an analyst or site has found the necessary information and calculated the number. I once used DSO to spot a problem in a big company weeks before it announced a disastrous quarter that sent its stock into a slide.

Research and Development

Innovation, crucial for companies, appears on the income statement under expenses as research and development, or R&D. More R&D spending doesn’t necessarily translate into more innovation. For years, Apple spent relatively little for a company of its size on R&D and still wowed the markets. But since 2010, Apple’s R&D spending has increased 7.5 times without an equivalent flow of new hits. You can examine how a company changed its R&D expenses over time. Divide R&D by revenue in the same period. The ratio lets you relatively compare companies of different sizes.

Sales, General and Administrative

Standing for sales, general and administrative, SG&A are the operational expenses that aren’t directly related to product manufacturing or purchasing. It includes many things, but you can think of it as overhead. The higher the number, and the higher percentage of revenue it represents, the less efficiently the company works. There are times high SG&A will be a given, both as an absolute numbers and percentage of revenue. A startup or an established company that makes a significant change in strategy may spend more to establish itself in new markets. All else being equal, a company with more control over SG&A than a rival has a competitive advantage.

Author

  • Erik Sherman

    Erik is an independent journalist and author who primarily covers business, economics, finance, technology, politics, and legal/regulatory, while elegantly expressing the complex and often incorporating data analysis.

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