DSO Interpretation

While the textbook discusses a cross sectional comparison of the components of the operating and and cash cycles, a recent article discusses a method to examine accounts receivable (AR) and days' sales outstanding (DSO) in a time series. For example, if AR is growing more quickly than DSO, the company could be offering credit terms that are too generous, or is attempting to book sales at the end of the quarter to make its performance look better. The examination of health care education company Healthstream in the article indicates neither of those. Two things we would like to point out in the article: The author points out that he likes to use end-of-quarter numbers rather than average receivables in his calculations. Remember, ratios can be calculated a number of different ways, and each has its own interpretation. So, if you are using ratios calculated by someone else, make sure you know how the ratio was calculated. Second, the author cautions that an investor should look into the root causes of the changes in ratios, which is always an important step any time you are examining financial ratios.