From the course: Corporate Financial Statement Analysis

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Analyze a company's full operating cycle

Analyze a company's full operating cycle

From the course: Corporate Financial Statement Analysis

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Analyze a company's full operating cycle

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One of my favorite things in accounting is to take these two ratios, day sales and inventory, and average collection period, and add them together. That will tell me a company's operating cycle. The operating cycle is how long from when we buy the inventory till we collect the cash associated with selling that inventory. Walmart, for example, sells the inventory that it purchases from Toro or Procter & Gamble or Ben and Jerry's ice cream in an average of 40 days. That's an average across all their product lines. Some items sell faster than that and some take longer, but on average, 40 days. Since for Walmart, all sales are basically cash sales, when you use a credit card at Walmart, effectively it's cash to them. You now owe your credit card company, now Walmart. So they buy the inventory, hold the inventory for 40 days and collect the cash from selling that inventory all in 40 days. Now let's take a look at Nike. They hold their inventory on average for 103 days. That's the length of…

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