Financial Statement Analysis

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**Days Sales Outstanding –**If you are a business owner, you would know that days sales outstanding (DSO) is one of most important parts of the cash conversion cycle.

In this article, we will discuss days sales outstanding (DSO) in detail.

Let’s get started.

## What is Days Sales Outstanding (DSO)?

When a company sells its products to another company, they sell a major share of the products on credit (sometimes the cent percent share).

And then after a certain period of time, the company collects the money from its debtors.

Days Sales Outstanding (DSO) is a calculation that shows – how good a company is in collecting its dues from its debtors.

Let us look at the graph above. We note that Colgate’s Days Sales Oustanding has been decreasing continuously and is currently at 34.09 days. On the other hand, Procter and Gamble Days Sales Oustanding has been moving up and down and is currently lower than that of Colgate at 25.15 days.

Let’s look at the Days Sales Outstanding formula now.

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**Days Sales Outstanding Formula**

Here is the DSO formula below

**Days Sales Outstanding Formula = Accounts Receivables / Net Credit Sales * 365**

**Days Sales Outstanding Interpretation**

In the above Days Sales Outstanding formula, you can see that the accounts receivables are being proportioned with the net credit sales. The accounts receivables are the amount due from the debtors. And the net credit sales can be calculated as follows –

Net Credit Sales = Gross Credit Sales – Sales Returns/Allowance/Discount

And then the proportion is being multiplied by 365 days to see the overall impact in a year.

So, what the Days Sales Outstanding formula is depicting?

It is depicting that how much money has already been collected and how much is yet to be received.

Understanding this will give an investor an idea of how good a company is in collecting its money due from its debtors. And we would be able to judge the efficiency of the collection as well.

The point is, days sales outstanding help us decide how long it takes for the company to collect money from its debtors and the number of days is added to the days inventory outstanding. Days inventory outstanding helps us understand how long it takes to transfer the raw materials into finished products. And then from the sum days payable outstanding (DPO) is deducted. DPO tells us how long it takes for the company to pay off its due to its creditors.

**Days Sales Outstanding Examples**

Here we will take two examples. In the first example, we will go through a simple DSO calculation. And in the next example, we will see how to calculate the cash conversion cycle.

**Days Sales Outstanding Example#1**

**Company Xing had gross credit sales of $500,000 in a year. It had sales returns of $50,000. It had accounts receivables of $90,000. Find out the Days Sales Outstanding (DSO).**

In this example, first, we will find out the ‘net credit sales’.

Gross credit sales are given and we also have sales return.

So, the net credit sales would be = ($500,000 – $50,000) = $450,000.

We also have been given accounts receivables. It is $90,000.

Now, we need to put the data into the DSO formula.

Days Sales Outstanding Formula = Accounts Receivables / Net Credit Sales * 365

Or, Days Sales Outstanding = $90,000 / $450,000 * 365 = 1/5 * 365 = 73 days.

That means, Company Xing takes 73 days to collect money from its debtors on an average.

**Days Sales Outstanding Example#2**

**Company Zang has the following information –**

- Cost of Sales – $300,000.
- Ending Inventory – $30,000.
- Accounts Payable – $60,000.
- Accounts Receivables – $60,000.
- Net Credit Sales – $360,000.

**Find out Days Inventory Outstanding (DIO), Days Payable Outstanding (DPO), and Days Sales Outstanding (DSO). And then also calculate the cash conversion cycle.**

This is an advanced example.

We will first compute the three important parts of the cash conversion cycle and then we will ascertain how many days it takes to complete the cash conversion cycle of Company Zang.

We will first look at each formula and the put in the data to find out the ratio.

The formula of Days Inventory Outstanding (DIO) = Ending Inventory / Cost of Sales * 365

Putting the data into the formula, we get –

DIO = $30,000 / $300,000 * 365 = 1/10 * 365 = 36.5 days.

The formula of Days Payable Outstanding (DIO) = Accounts Payable / Cost of Sales * 365

Putting the data into the formula, we get –

DPO = $60,000 / $300,000 * 365 = 1/5 * 365 = 73 days.

The formula of Days Sales Outstanding (DSO) = Accounts Receivables / Net Credit Sales * 365

Putting the data into the Days Sales Outstanding formula, we get –

DSO = $60,000 / $360,000 * 365 = 1/6 * 365 = 60.73 days.

Now, we will look at the formula of cash conversion cycle –

Putting the data into the formula, we get –

Cash Conversion Cycle = 60.73 days + 36.5 days – 73 days

Or, Cash Conversion Cycle = 24.23 days.

Since the company takes more time to pay off its creditors, quickly collects the money from its debtors, and translates the raw materials into finished goods in a short period of time, it is able to create a cash conversion cycle which is just 24.23 days.

From the point of view of efficiency, it’s a great achievement because cash flow is the lifeblood of the business. And from the calculation above, it is evident that Company Zang has been doing quite well in completing the full cash conversion cycle within a short period of time.

**Note: **A quick note is needed to be given here. Just calculation of the cash conversion cycle isn’t enough to justify whether the company is doing well or not. Of course, completing the cash conversion cycle within a month is commendable; but we also need to compare the result with other similar companies under the same industry to get an idea about it.

## Sector Examples of Days Sales Oustanding

#### Days Sales Oustanding Example – Airlines Sector

Below is the DSO of top companies in Airlines Sector

Name | Market Cap ($ billion) | Days Sales Outstanding |

American Airlines Group | 24,614 | 13.71 |

Alaska Air Group | 9,006 | 15.82 |

Azul | 7,283 | 0.00 |

China Eastern Airlines | 9,528 | 28.53 |

Copa Holdings | 5,788 | 18.62 |

Delta Air Lines | 39,748 | 18.80 |

Gol Intelligent Airlines | 21,975 | 23.95 |

JetBlue Airways | 6,923 | 8.48 |

LATAM Airlines Group | 8,459 | 41.32 |

Southwest Airlines | 39,116 | 9.11 |

Ryanair Holdings | 25,195 | 3.45 |

United Continental Holdings | 19,088 | 11.50 |

China Southern Airlines | 9,882 | 19.04 |

- We note that the list of companies above have a mixed Days Sales Outstanding ranging from 0 to 41.32 days
- LATAM Airlines Group has one of the highest Days Sales Outstanding with 41.32 days, whereas, Ryanair Holdings have a lower DSO at 3.45 days.

#### Days Sales Oustanding Example of Automobile Sector

Below is the DSO of top companies in Automobile sector.

Name | Market Cap ($ billion) | Days Sales Outstanding |

Ford Motor | 50,409 | 136.51 |

Fiat Chrysler Automobiles | 35,441 | 22.92 |

General Motors | 60,353 | 63.72 |

Honda Motor Co | 60,978 | 67.85 |

Ferrari | 25,887 | 139.05 |

Toyota Motor | 186,374 | 109.18 |

Tesla | 55,647 | 17.42 |

Tata Motors | 22,107 | 35.34 |

- Ferrari and Ford Motors have one of the highest Days Sales Outstanding at 139.05 days and 136.51 days, respectively.
- Tesla has one of the lowest Days Sales Outstanding in the group of Automobile companies at 17.42 days

#### Days Sales Oustanding Example of Discount Stores

Below is the DSO and Market Cap of top companies in Discount Stores sector.

Name | Market Cap ($ billion) | Days Sales Outstanding |

Burlington Stores | 8,049 | 2.67 |

Costco Wholesale | 82,712 | 3.80 |

Dollar General | 25,011 | 0.15 |

Dollar Tree Stores | 25,884 | 2.58 |

Target | 34,821 | 3.90 |

Wal-Mart Stores | 292,683 | 4.30 |

- Overall, we note that the sector has very low DSO. Most of them range from 0.15 days to 4.30 days
- WalMart Stores has a DSO of 4.3 days, whereas, Dollar General has a DSO of 0.15 days.

#### Days Sales Oustanding Example of Oil & Gas Sector

Below is the DSO of top companies in Oil & Gas Sector.

Name | Market Cap ($ billion) | Days Sales Outstanding |

ConocoPhillips | 62,980 | 59.39 |

CNOOC | 62,243 | 56.57 |

EOG Resources | 58,649 | 52.48 |

Occidental Petroleum | 54,256 | 122.14 |

Canadian Natural | 41,130 | 67.57 |

Pioneer Natural Resources | 27,260 | 69.06 |

Anadarko Petroleum | 27,024 | 97.34 |

Continental Resources | 18,141 | 127.25 |

Apache | 15,333 | 81.16 |

Hess | 13,778 | 82.32 |

- We note that oeverall this sector has a higher DSO as compared to other sectors.
- In this group, Continental Resources has the highest DSO of 127.25 days, whereas, EOG Resources has a lower DSO of 52.48 days.

## Net credit sales to calculate Days Sales Outstanding ratio?

If you’re new to investments, you may wonder how you would get the data of the accounts receivables and net credit sales.

In this section, we will get you covered.

All you would need is two financial statements – the balance sheet and the income statement.

In the balance sheet, you would be able to locate the accounts receivables. You need to look under the assets section where current assets are given. Under current assets, you will get the data for accounts receivables.

In the income statement, you will get the data for net credit sales. At the beginning of the income statement, you would see the gross sales. This “gross sales” includes both – cash & credit sales. You need to pick the credit sales and you also need to deduct the sales returns (if any) which has been returned in the case of credit sales.

Using these two, you would easily be able to compute the days sales outstanding (DSO). And by looking at the income statement and the balance sheet, you would also be able to find the cost of sales, ending inventory, and accounts payable to be able to ascertain the cash conversion cycle.

## Additional Resources

This was the guide to Days Sales Oustanding, Days Sales Outstanding Formula, and its examples. You may also have a look at the below articles learn further –

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