Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : TLAB info? -- Ignore unavailable to you. Want to Upgrade?

To: Bob Martin who wrote (4342)	11/5/1998 8:31:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 7342

Bob, actually there are multiple issues involved, and the Fool's use of a single metric (flow rate) smears the issues. Let me separate two of them: 1. Inventory levels is commonly measured as days of inventory, and is computed as (inventory/cogs)x365 -- assuming a one year income statement. While lower numbers are better, companies must take care to see that there is adequate raw materials inventory for manufacturing. 2. DSO levels are measured to determine the effectiveness of management in getting payment, and in the quality of the customers with which the company does business. However, European and South American customers frequently require greater time for payment. Also, relaxed terms are often used as a selling point -- it is tantamount to financing the deal. Sloppy analysts often use DSO as an indication of either stuffing the channel (selling on a recourse basis to resellers as Compaq did) or dropping prices at the end of the quarter to "make the number". But increasing DSO is also the hallmark of a business experiencing increasing sales. DSO is calculated as AR/Sales x 365. Tom Meredith, CFO of Dell has come up with an interesting metric to measure manufacturing/collection efficiency, which he calls the cash conversion cycle (CCC) DSO + DI - DP where DSO is days of accounts receivable, DI is days of inventory, and DP is days of payables. All other things being equal, the lower the number the better. Dell has a CCC of around -5 (yes, that's a negative number!) So, the issue is not whether TLAB's CCC or DSO is within historic levels, but whether there is an opportunity for improvement without jeopardizing the business. If this is done properly it allows the liberation of significant amounts of cash, and more importantly, allows for the expansion of the business without the necessity of external funding. TTFN, CTC