From the course: Corporate Financial Statement Analysis

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Compare Harley and McDonald’s efficiency metrics

Compare Harley and McDonald’s efficiency metrics

From the course: Corporate Financial Statement Analysis

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Compare Harley and McDonald’s efficiency metrics

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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. Together they tell me a company's operating cycle. An operating cycle is how long from when we buy the inventory till we collect the cash associated with selling that inventory. Now we just went through how these numbers are computed. Let's look at a couple of companies that we are all familiar with and see if those numbers make sense given what we know about the companies. Let's start with McDonald's. How long does their food and stuff that we eat sit with the company before it's sold to us? It turns out, we can calculate that. Remember, we first compute our inventory turnover measure by dividing cost of sales by average inventory. For McDonald's, their inventory turnover is 55. In other words, McDonald's turns their inventory over 55 times in a year. How many days is that? Well, we simply divide 55 into 365 days to get the answer. It…

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