Financial Series - Analyzing a Customer's Financial Statements - Ratios

Here is the first of a 6 part Financial Series to be published bi-weekly.

The analysis of a Customer’s annual report and other financial statements has been a key sales practice for many years. Some say it is slowly becoming a lost skill. So, to refresh that skill, here is a short review of some common tools used.

For each Ratio listed, desired values or normal ranges of values can vary. Seek input from specific industry analysts in your evaluation. Desired results, industry averages, etc. can be unique by industry and business type and are important when used as a comparison to other companies.

• Liquidity – how effectively the company is balancing the current funds flow operation





• Current Ratio = (Current Assets / Current Liabilities) can be a good sign of the customers working capital


• Quick Ratio = (Current Assets – Inventory / Current Liabilities) also known as the “acid test”, lessens the effect of inventory in the analysis



• Ownership: debt ratio = {Debt (Current Liabilities + Long-term Liabilities) / total assets} will offer some view of whether the company is mainly owned by its shareholders or its creditors.



• Profitability –





• Profit Margin = (Net Income After Taxes / Net Sales) simply how profitably they are


• Return on Total Assets = (Net Income After Taxes / Total Assets) a measure of the efficiency management invests its profits in assets


• Earnings per Share = (Net Income After Taxes / Number of Common Shares Outstanding) a value normally used to determine the company’s stock desirability



• Activity – measures of operational aspects of the company





• Collection Period = (Net Accounts Receivable / Average Day’s Sales) long or short collection periods may indicate operational health


• Inventory Turnover = (Cost of Goods Sold / Year-end Inventory) very unique to the customer’s industry, but provides a great comparison to others


• Operating Cycle =DSO + Days Inventory (DSO is Days Sales Outstanding)

There are many other ratios and tools used to analyze a customer’s financial statements. Sales people with a mastery of these subjects will have an easier time positioning major purchases of their products in the most favorable way.

Just as with all generic tools and techniques, they should not be done in a vacuum. You should combine the results of your analysis with other data and observable facts to draw reasonably prudent conclusions. With practice and historical data, you can use these tools to guide your selling activities and improve results.