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Ratios and Quality Indicators for
Credit Analysis
This page provides business persons
several tools to help them formulate credit policies.
The following indicators are the same ones used
by financial institutions in scoring loan applications.
By clicking on the gray header for
each tool, you will be able to enter data and
calculate the result.
Balance
Sheet Quality Indicators
Analysis
of current non-cash assets
Days
Receivable
Definition: Average number of days
customers take to pay.
Formula: Receivables x 360 (days
in statement period)/Net Sales
When analyzing:
- Look for trends (Red flag: Customers
paying slower)
- Compare Days Receivable with
Terms Offered (Red Flag: Your terms are much
less generous than what your customers are taking.)
- Compare Days Receivable with
Industry Standards (Are you comparable to the
rest of the industry?
- Obtain an Aging of Receivables
(if there appears to be a collection problem).
Days
Inventory
Definition: Average days
worth of inventory on hand
Formula: (Inventory x 360) / COGS
(cost of goods sold)
When Analyzing:
- Look for trends
- Compare Days Inventory with Inventory
Cycle
- Compare Days Inventory with
Industry Standards
Days Payable (D/P)
Definition: Average number of days
business is taking to pay suppliers
Formula: Payables x 360
COGS
When Analyzing:
- Look for trends
- Compare Days Payable with Terms
Offered by Suppliers
- Compare Days Payable with Industry
Standards
- Obtain an Aging of Payables
(if there appears to be a payment
Problem)
Days Cash
Definition: The average days of
cash a company has on hand.
Formula: Cash x 360
Sales
When Analyzing:
Rule of thumb is that three
to seven days cash is adequate,
however, this varies significantly from company
to company
and industry to industry.
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