W had not even arrived at his apartment when a suited man came up behind him. The man hissed, "The Inquisitor wants you..." and then knocked W unconscious with a swift blow to the head.

W awoke to face the Inquisitor for the second time, up on the stage in the enormous room filled with audience members. "So," she said, "you've been busy since we last met.You learned about Rodeo Semiconductor's financial troubles, did you not?"

"Um... yes, that is true..."

"Please take the paper out of your left pocket and tell the jury what it is."

"But, uh, what is...I mean who...yes, who is the jury?" inquired W.

The Inquisitor smiled a wry grin and pointed towards the large crowd. Many of the faces appeared to be the same as before.

"Is this a jury of my peers?" he asked. "My constitutional rights guarantee me a jury of my peers!" The Inquisitor laughed, then said, "Now, I ask again: would you take the paper out of your left pocket and tell the jury what it is?" W reached in his pocket and pulled out the copy he had made of Rodeo's financial statements.

The Inquisitor closed in. "So you just happen to be running around with the financial statements of a company that just happened to go bankrupt? Do you realize that we have testimony from several officials at a large local bank alleging that you bribed them to drive Rodeo Semiconductor into bankruptcy?"

W didn't even think he knew any bank officials, but the biting tone of the Inquisitor's voice interrupted his thoughts. "Mister W, could you tell us the status of Rodeo's working capital and current ratio, given the information on that sheet?"

"Madam Inquisitor, both seemed healthy, but the quick ratio was in very bad shape."

"You are correct on that Mister W, but as you should very well know, Rodeo Semiconductor had great liquidity through an enviable receivable turnover." Suddenly remembering that he had the Fool's sheet on liquidity in his other pocket, W looked for receivable turnover.

"One company's receivables are not necessarily as liquid as another's -- the same holds true with inventory," read the sheet. "Examine these two companies' data:

                            QuickCo      SlowCo
   Sales                 $150,000,000 $250,000,000
   Cost of goods sold    $ 90,000,000 $150,000,000
   Accounts receivable   $ 25,000,000 $100,000,000
   Inventory             $ 30,000,000 $200,000,000

"SlowCo has higher receivables and inventories than QuickCo, but they are less liquid. See why? SlowCo's receivable turnover is much higher than QuickCo's."

***What is QuickCo's receivable turnover?***

1) About 61.
2) 6.
3) 3.6.
4) Not determinable from the information given.

Liquidity information provided by Joe Louderback.

The answer is 2) 6.

The sheet explained, "Receivable turnover is sales/accounts receivable. It measures the rapidity with which the company collects its sales. It is one of a couple of important activity ratios. The higher the turnover, the quicker customers pay. The relationship might better be seen by looking at another ratio that measures the same thing. Days' Sales in Accounts Receivable is 365/receivables turnover, which is about 61 days for QuickCo, 365/6. Some people find days' sales a more intuitive way of looking at the rapidity of collections. Thus, QuickCo's receivables are, on average, about 61 days old.

"Days's sales are also:

             $25,000,000
       ---------------------
           $150,000,000/365

"Many analysts compute turnovers using the average of beginning and end of period figures for receivables, while some use end of period receivables.

"Are QuickCo's 3.6 turnover and 61 days's sales good? They are 'better' than SlowCo's 2.5 turnover and 146 days (calculate these yourself!), but we cannot reach a firm conclusion without knowing more about the industries in which they operate, normal values for peer companies, and trends over time. For example, a high turnover, but one which is falling over time, might signal some unwise relaxation of credit policies."

W couldn't see exactly how that information might help him right now, but perhaps it didn't matter: suddenly he spied something which could, just possibly, turn out to be his salvation.

© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us