Financial Statements_ Working Capital _ Investopedia

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Financial Statements: Working Capitalinancial Statements: Working Capital

ByDavidHarperyDavidHarper

(Contact Davidontact David)

A recurring theme in this series is the importance of investors shaping their analytical focusrecurring theme in this series is the importance of investors shaping their analytical focus

according to companies' business models. Especially when time is limited, it's smart to tailorccording to companies' business models. Especially when time is limited, it's smart to tailor

your emphasis so it's in line with the economic drivers that preoccupy the company'sour emphasis so it's in line with the economic drivers that preoccupy the company's

industry. It's tough to get ahead of the "investing pack" if you are reacting to generic financialndustry. It's tough to get ahead of the "investing pack" if you are reacting to generic financial

results - such asesults - such as earnings per sharearnings per share(EPS) or revenue growth - after they've already been(EPS) or revenue growth - after they've already been

reported. For any given business, there are usually some key economic drivers, oreported. For any given business, there are usually some key economic drivers, or leadingeading

indicatorsndicators, that capture and reflect operational performance and eventually translate intothat capture and reflect operational performance and eventually translate into

lagging indicatorsagging indicatorssuch as EPS. For certain businesses, trends in the working capital accountssuch as EPS. For certain businesses, trends in the working capital accounts

can be among these key leading indicators of financial performance.an be among these key leading indicators of financial performance.

Where is Working Capital Analysis Most Critical?here is Working Capital Analysis Most Critical?On the one hand,n the one hand, working capitalorking capitalis always significant. This is especially true from theis always significant. This is especially true from the

lender's or creditor's perspective, where the main concern is defensiveness: can the companyender's or creditor's perspective, where the main concern is defensiveness: can the company

meet its short-term obligations, such as paying vendor bills?eet its short-term obligations, such as paying vendor bills?

But from the perspective of equity valuation and the company's growth prospects, workingut from the perspective of equity valuation and the company's growth prospects, working

capital is more critical to some businesses than to others. At the risk of oversimplifying, weapital is more critical to some businesses than to others. At the risk of oversimplifying, we

could say that the models of these businesses are asset orould say that the models of these businesses are asset or capital intensiveapital intensiverather than servicerather than service

orr people intensiveeople intensive. Examples of service intensive companies include H&R Block, whichExamples of service intensive companies include H&R Block, which

provides personal tax services, and Manpower, which provides employment services. In assetrovides personal tax services, and Manpower, which provides employment services. In asset

intensive sectors, firms such as telecom and pharmaceutical companies invest heavily inntensive sectors, firms such as telecom and pharmaceutical companies invest heavily in fixedixed

assetsssetsfor the long term, whereas others invest capital primarily to build and/or buyfor the long term, whereas others invest capital primarily to build and/or buy

inventory. It is the latter type of business - the type that is capital intensive with a focus onnventory. It is the latter type of business - the type that is capital intensive with a focus oninventory rather than fixed assets - that deserves the greatest attention when it comes tonventory rather than fixed assets - that deserves the greatest attention when it comes to

working capital analysis. These businesses tend to involve retail, consumer goods andorking capital analysis. These businesses tend to involve retail, consumer goods and

technology hardware, especially if they are low-cost producers or distributors.echnology hardware, especially if they are low-cost producers or distributors.

Working capital is the difference betweenorking capital is the difference between current assetsurrent assetsandand current liabilitiesurrent liabilities:

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Yield To Maturity (YTM)ield To Maturity (YTM)

Weighted Average Cost Of Capital -eighted Average Cost Of Capital - WACC

Implied Volatility - IVmplied Volatility - IV

International Monetary Fund - IMFnternational Monetary Fund - IMF

Gross Domestic Product - GDPross Domestic Product - GDPDebt-Service Coverage Ratio (DSCRebt-Service Coverage Ratio (DSCR)

Financial Statements: WorkingCapitalinancial Statements: WorkingCapitalYou may also like:ou may also like Does Warren Buffett own the same stock as you?oes Warren Buffett own the same stock as you?

7. Financial Statements: Working Capital

8. Financial Statements: Long-Lived Assets

9. Financial Statements: Long-Term Liabilities

10. Financial Statements: Pension Plans

11. Financial Statements: Conclusion

AA

Byy David Harperavid Harper

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Inventorynventory

Inventory balances are significant because inventory cost accounting impacts reported grossnventory balances are significant because inventory cost accounting impacts reported gross

profit marginsrofit margins. (For an explanation of how this happens, see(For an explanation of how this happens, see Inventory Valuation Fornventory Valuation For

Investors: FIFO and LIFOnvestors: FIFO and LIFO .) Investors tend to monitor gross profit margins, which are often) Investors tend to monitor gross profit margins, which are often

considered a measure of the value provided to consumers and/or the company'sonsidered a measure of the value provided to consumers and/or the company's pricingricing

powerowerin the industry. However, we should be alert to how much gross profit marginsin the industry. However, we should be alert to how much gross profit margins

depend on the inventory costing method.epend on the inventory costing method.

Below we compare three accounts used by three prominent retailers:elow we compare three accounts used by three prominent retailers: net saleset sales, cost of goodsost of goods

soldold(COGS) and the(COGS) and the LIFOIFOreserve.reserve.

Walgreen's represents our normal case and arguably shows the best practice in this regard:algreen's represents our normal case and arguably shows the best practice in this regard:

the company uses LIFO inventory costing, and its LIFO reserve increases year over year. In ahe company uses LIFO inventory costing, and its LIFO reserve increases year over year. In a

period of rising prices, LIFO will assign higher prices to the consumed inventory (cost oferiod of rising prices, LIFO will assign higher prices to the consumed inventory (cost of

goods sold) and is therefore more conservative. Just as COGS on theoods sold) and is therefore more conservative. Just as COGS on the income statementncome statementtendstendsto be higher under LIFO than undero be higher under LIFO than under FIFOIFO, the inventory account on thethe inventory account on the balance sheetalance sheettendstends

to be understated. For this reason, companies using LIFO must disclose (usually in ao be understated. For this reason, companies using LIFO must disclose (usually in a

footnote) a LIFO reserve, which when added to the inventory balance as reported, gives theootnote) a LIFO reserve, which when added to the inventory balance as reported, gives the

FIFO-equivalent inventory balance.IFO-equivalent inventory balance.

Because GAP Incorporated uses FIFO inventory costing, there is no need for a "LIFOecause GAP Incorporated uses FIFO inventory costing, there is no need for a "LIFO

reserve." However, GAP's and Walgreen's grosseserve." However, GAP's and Walgreen's gross profit marginsrofit marginsare not commensurable. Inare not commensurable. In

other words, comparing FIFO to LIFO is not like comparing apples to apples. GAP will get ather words, comparing FIFO to LIFO is not like comparing apples to apples. GAP will get a

slight upward bump to its gross profit margin because its inventory method will tend tolight upward bump to its gross profit margin because its inventory method will tend to

undercount the cost of goods. There is no automatic solution for this. Rather, we can revisendercount the cost of goods. There is no automatic solution for this. Rather, we can revise

GAP's COGS (in dollar terms) if we make an assumption about theAP's COGS (in dollar terms) if we make an assumption about the inflationnflationrate during therate during the

year. Specifically, if we assume that the inflation rate for the inventory was R% during theear. Specifically, if we assume that the inflation rate for the inventory was R% during theyear, and if "Inventory Beginning" in the equation below equals the inventory balance underear, and if "Inventory Beginning" in the equation below equals the inventory balance under

FIFO, we can re-estimate COGS under LIFO with the following equation:IFO, we can re-estimate COGS under LIFO with the following equation:

Trading Centerrading Center
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Kohl's Corporation uses LIFO, but its LIFO reserve declined year over year - from $4.98ohl's Corporation uses LIFO, but its LIFO reserve declined year over year - from $4.98

million to zero. This is known asillion to zero. This is known as LIFO liquidationIFO liquidationor liquidation of LIFO layers, and indicatesor liquidation of LIFO layers, and indicates

that during the fiscal year, Kohl's sold or liquidated inventory that was held at the beginninghat during the fiscal year, Kohl's sold or liquidated inventory that was held at the beginning

of the year. When prices are rising, we know that inventory held at the beginning of the yearf the year. When prices are rising, we know that inventory held at the beginning of the year

carries a lower cost (because it was purchased in prior years). Cost of goods sold is thereforearries a lower cost (because it was purchased in prior years). Cost of goods sold is therefore

reduced, sometimes significantly. Generally, in the case of a sharply declining LIFO reserve,educed, sometimes significantly. Generally, in the case of a sharply declining LIFO reserve,

we can assume that reported profit margins are upwardly biased to the point of distortion.e can assume that reported profit margins are upwardly biased to the point of distortion.

Cash Conversion Cycleash Conversion Cycle

Thehe cash conversion cycleash conversion cycleis a measure ofis a measure of

working capital efficiency, often giving valuableorking capital efficiency, often giving valuableclues about the underlying health of a business.lues about the underlying health of a business.

The cycle measures the average number of dayshe cycle measures the average number of days

that working capital is invested in the operatinghat working capital is invested in the operating

cycle. It starts by adding days inventoryycle. It starts by adding days inventory

outstanding (DIO) toutstanding (DIO) to days sales outstandingays sales outstanding

(DSO). This is because a company "invests" itsDSO). This is because a company "invests" its

cash to acquire/build inventory, but does notash to acquire/build inventory, but does not

collect cash until the inventory is sold and theollect cash until the inventory is sold and the

accounts receivableccounts receivableare finally collected.are finally collected.

Receivableseceivablesare essentially loans extended to customers that consume working capital;are essentially loans extended to customers that consume working capital;

therefore, greater levels of DIO and DSO consume more working capital. However,herefore, greater levels of DIO and DSO consume more working capital. However, daysayspayable outstandingayable outstanding(DPO), which essentially represent loans from vendors to the company,(DPO), which essentially represent loans from vendors to the company,

are subtracted to help offset working capital needs. In summary, the cash conversion cycle isre subtracted to help offset working capital needs. In summary, the cash conversion cycle is

measured in days and equals DIO + DSO DPO:easured in days and equals DIO + DSO DPO:

Here we extracted two lines from Kohl's (a retail department store) most recent incomeere we extracted two lines from Kohl's (a retail department store) most recent income

statement and a few lines from their working capital accounts.tatement and a few lines from their working capital accounts.

Circled in green are the accounts needed to calculate the cash conversion cycle. From theircled in green are the accounts needed to calculate the cash conversion cycle. From the

income statement, you need net sales and COGS. From the balance sheet, you needncome statement, you need net sales and COGS. From the balance sheet, you need

receivables, inventories and payables. Below, we show the two-step calculation. First, weeceivables, inventories and payables. Below, we show the two-step calculation. First, we

calculate the three turnover ratios:alculate the three turnover ratios: receivables turnovereceivables turnover(sales/average receivables),(sales/average receivables),
http://www.investopedia.com/terms/r/receivableturnoverratio.asphttp://www.investopedia.com/terms/d/dpo.asphttp://www.investopedia.com/terms/r/receivables.asphttp://www.investopedia.com/terms/a/accountsreceivable.asphttp://www.investopedia.com/terms/d/dso.asphttp://www.investopedia.com/terms/c/cashconversioncycle.asphttp://www.investopedia.com/terms/l/lifoliquidation.asphttp://www.googleadservices.com/pagead/aclk?sa=L&ai=COAOBh-tKVtzDM5D1bKzph-ANlq-r7gf25NaH4gGG_fvRhgIQASCO0LgfYJmGn4a8IaAByrXF5wPIAQSpAr-gY0E-QZc-qAMBqgTBAU_QWFh3DRE6sZQDwu_i0gWp18Gm-0ivbl7Z9jQlqs0BsmQn1349xZwDpU3Dc5ExO1F3dXWZoQFiFDoPowQNO_laGuROuoTHwqXl8dKKFOugfIOgJNelwkobAETu0YtbCDTQzCX_O_hBZDg86U91jplN75gkXENzIqKE0Nfkg61ANMF1N8pOMcXSwgkC6LIqFxQ_e4hOe3yjtV2tbYdJ5T-jGRE2pAE3b_w80PQK3IAxu8XpYxSmNl6GRnLr-4L6Ksz6BQYIJRABGACIBgGgBi6AB57KuhioB6a-G9gHANgTCA&num=1&cid=5Gi_qy-79rawVINuFpXowYzn&sig=AOD64_0SmeTfscfAHc2LZMoqGCAPztN36A&adurl=https://ctrack.metrics34.com/index.php%3Fredirect%3Dhttp://www.flo.com.tr/Lumberjack-150003a01-M-5005-Kahverengi-Erkek-Ayakkabi.html%26cl%3D0313939323236323131303%26bm%3D1%26bmcl%3D9353537353730393633303%26cp%3D224379542%26ag%3D11740465622%26sbm%3D2%26ad%3D60366662822%26pl%3Dwww.investopedia.com%26bk%3D%26admt%3D%26crmt%3D%26f%3D%26fi%3D%26crid%3D70501990022%26ph%3D1%26nw%3Dd%26d%3Dc%26dm%3D%26tg%3Dboomuserlist%253A%253A5210462%26ap%3Dnone%26pt%3D%26at%3D%26p1%3D%26p2%3D%26ac%3D&client=ca-pub-1776282838082166


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inventory turnovernventory turnover(COGS/average inventory) and payables turnover (purchases/average(COGS/average inventory) and payables turnover (purchases/average

payables). The turnover ratios divide into an average balance because the numerators (suchayables). The turnover ratios divide into an average balance because the numerators (such

as sales in the receivables turnover) are flow measures over the entire year.s sales in the receivables turnover) are flow measures over the entire year.

Also, for payables turnover, some use COGS/average payables. That's okay, but it's slightlylso, for payables turnover, some use COGS/average payables. That's okay, but it's slightly

more accurate to divide average payables into purchases, which equals COGS plus theore accurate to divide average payables into purchases, which equals COGS plus the

increase in inventory over the year (inventory at end of year minus inventory at beginning ofncrease in inventory over the year (inventory at end of year minus inventory at beginning of

the year). This is better because payables finance all of the operating dollars spent during thehe year). This is better because payables finance all of the operating dollars spent during the

period (that is, they are credit extended to the company). And operating dollars, in additioneriod (that is, they are credit extended to the company). And operating dollars, in addition

to COGS, may be spent to increase inventory levels.o COGS, may be spent to increase inventory levels.

The turnover ratios do not mean much in isolation; they are used to compare one company tohe turnover ratios do not mean much in isolation; they are used to compare one company to

another. But if you divide the turnover ratios into 365 (for example, 365/receivablesnother. But if you divide the turnover ratios into 365 (for example, 365/receivables

turnover), you get the "days outstanding" numbers. Below, for example, a receivable turnoverurnover), you get the "days outstanding" numbers. Below, for example, a receivable turnover

of 9.6 becomes 38 days sales outstanding (DSO). This number has more meaning; it meansf 9.6 becomes 38 days sales outstanding (DSO). This number has more meaning; it means

that, on average, Kohl's collects its receivables in 38 days.hat, on average, Kohl's collects its receivables in 38 days.

Here is a graphic summary of Kohl's cash conversion cycle for 2003. On average, workingere is a graphic summary of Kohl's cash conversion cycle for 2003. On average, working

capital spent 92 days in Kohl's operating cycle:apital spent 92 days in Kohl's operating cycle:

Let's contrast Kohl's with Limited Brands. Below we perform the same calculations in orderet's contrast Kohl's with Limited Brands. Below we perform the same calculations in order

to determine the cash conversion cycle for Limited Brands:o determine the cash conversion cycle for Limited Brands:
http://www.investopedia.com/terms/i/inventoryturnover.asp


5/7

While Kohl's cycle is 92 days, Limited Brand's cycle is only 37. Why does this matter?While Kohl's cycle is 92 days, Limited Brand's cycle is only 37. Why does this matter?

Becauseecause working capitalorking capitalmust be financed somehow, with either debt or equity, and bothmust be financed somehow, with either debt or equity, and both

companies use debt. Kohl's cost of sales (COGS) is about $6.887 billion per year, or almostompanies use debt. Kohl's cost of sales (COGS) is about $6.887 billion per year, or almost

$18.9 million per day ($6.887 billion/365 days). Because Kohl's cycle is 92 days, it must18.9 million per day ($6.887 billion/365 days). Because Kohl's cycle is 92 days, it must

finance--that is, fund its working capital needs--to the tune of about $1.7+ billion per yearinance--that is, fund its working capital needs--to the tune of about $1.7+ billion per year

($18.9 million x 92 days). If interest on its debt is 5%, then the cost of this financing is about$18.9 million x 92 days). If interest on its debt is 5%, then the cost of this financing is about

$86.8 million ($1.7 billion x 5%) per year. However, if, hypothetically, Kohl's were able to86.8 million ($1.7 billion x 5%) per year. However, if, hypothetically, Kohl's were able to

reduce its cash conversion cycle to 37 days--the length of Limited Brands' cycle--its cost ofeduce its cash conversion cycle to 37 days--the length of Limited Brands' cycle--its cost of

financing would drop to about $35 million ($18.9 million per day x 37 days x 5%) per year. Ininancing would drop to about $35 million ($18.9 million per day x 37 days x 5%) per year. In

this way, a reduction in the cash conversion cycle drops directly to thehis way, a reduction in the cash conversion cycle drops directly to the bottom lineottom line.

But even better, the year over year trend in the cash conversion cycle often serves as a signut even better, the year over year trend in the cash conversion cycle often serves as a sign

of business health or deterioration. Declining DSO means customers are paying sooner;f business health or deterioration. Declining DSO means customers are paying sooner;

conversely, increasing DSO could mean the company is using credit to push product. Aonversely, increasing DSO could mean the company is using credit to push product. A

declining DIO signifies that inventory is moving out rather than "piling up." Finally, someeclining DIO signifies that inventory is moving out rather than "piling up." Finally, some

analysts believe that an increasing DPO is a signal of increasing economic leverage in thenalysts believe that an increasing DPO is a signal of increasing economic leverage in the

marketplace. The textbook examples here are Walmart and Dell: these companies canarketplace. The textbook examples here are Walmart and Dell: these companies can

basically dictate the terms of their relationships to their vendors and, in the process, extendasically dictate the terms of their relationships to their vendors and, in the process, extend

their days payable (DPO).heir days payable (DPO).

Looking "Under the Hood" for Other Itemsooking "Under the Hood" for Other Items

Most of the other working capital accounts are straightforward, especially the currentost of the other working capital accounts are straightforward, especially the current

liabilities side of the balance sheet. But you do want to be on the alert for the following:iabilities side of the balance sheet. But you do want to be on the alert for the following:

Off-balance-sheet financingff-balance-sheet financing

Derivativeserivatives

For examples of these two items, consider the current assets section of Delta Airlines' fiscalFor examples of these two items, consider the current assets section of Delta Airlines' fiscal

year 2003 balance sheet:ear 2003 balance sheet:
http://www.investopedia.com/terms/d/derivative.asphttp://www.investopedia.com/terms/o/obsf.asphttp://www.investopedia.com/terms/b/bottomline.asphttp://www.investopedia.com/terms/w/workingcapital.asp


6/7

Notice that Delta's receivables more than doubled from 2002 to 2003. Is this a dangerous signotice that Delta's receivables more than doubled from 2002 to 2003. Is this a dangerous sign

of collections problems? Let's take a look at the footnote:f collections problems? Let's take a look at the footnote:

We were party to an agreement, as amended, under which we sold a defined poole were party to an agreement, as amended, under which we sold a defined pool

of our accounts receivable, on a revolving basis, through a special-purpose, whollyf our accounts receivable, on a revolving basis, through a special-purpose, wholly

owned subsidiary, which then sold an undivided interest in the receivables to awned subsidiary, which then sold an undivided interest in the receivables to a

third party.... This agreement terminated on its scheduled expiration date of Marchhird party.... This agreement terminated on its scheduled expiration date of March

31, 2003. As a result, on April 2, 2003, we paid $250 million, which represented1, 2003. As a result, on April 2, 2003, we paid 250 million, which represented

the total amount owed to the third party by the subsidiary, and subsequentlyhe total amount owed to the third party by the subsidiary, and subsequently

collected the related receivables. (Note 8, Delta 10-K FY 2003)ollected the related receivables. (Note 8, Delta 10-K FY 2003)

Here's the translation: during 2002, most of Delta's receivables were factored in an off-ere's the translation: during 2002, most of Delta's receivables were factored in an off-

balance sheet transaction. By factored, we mean Delta sold some of its accounts receivablesalance sheet transaction. By factored, we mean Delta sold some of its accounts receivables

to another company (via a subsidiary) in exchange for cash. In brief, Delta gets paid quicklyo another company (via a subsidiary) in exchange for cash. In brief, Delta gets paid quickly

rather than having to wait for customers to pay. However, the seller (Delta in this case)ather than having to wait for customers to pay. However, the seller (Delta in this case)

typically retains some or all of the credit risk - the risk that customers will not pay. Forypically retains some or all of the credit risk - the risk that customers will not pay. For

example, they may collateralize the receivables.xample, they may collateralize the receivables.

We see that during 2003, the factored receivables were put back onto the balance sheet. Ine see that during 2003, the factored receivables were put back onto the balance sheet. In

economic terms, they never really left but sort of disappeared in 2002. So the 2003 number isconomic terms, they never really left but sort of disappeared in 2002. So the 2003 number is

generally okay, but there was not a dramatic jump. More importantly, if we were to analyzeenerally okay, but there was not a dramatic jump. More importantly, if we were to analyze

year 2002, we'd have to be sure to manually "add-back" the off-balance sheet receivables,ear 2002, we'd have to be sure to manually "add-back" the off-balance sheet receivables,which would otherwise look artificially favorable for that year.hich would otherwise look artificially favorable for that year.

We also highlighted Delta's increase in "prepaid expenses and other" because this innocent-e also highlighted Delta's increase in "prepaid expenses and other" because this innocent-

looking account contains theooking account contains the fair valueair valueof Delta's fuelof Delta's fuel hedgeedgederivatives. Here's what thederivatives. Here's what the

footnote says:ootnote says:

Prepaid expenses and other current assets increased by 34%, or $120 million,repaid expenses and other current assets increased by 34%, or 120 million,

primarily due to an increase in prepaid aircraft fuel as well as an increase in the fairrimarily due to an inc rease in prepaid aircraft fuel as we ll as an increase in the fair

value of our fuel hedge derivative contracts.... Approximately 65%, 56% and 58% ofalue of our fuel hedge derivative contracts.... Approximately 65%, 56% and 58% of

our aircraft fuel requirements were hedged during 2003, 2002 and 2001,ur aircraft fuel requirements were hedged during 2003, 2002 and 2001,

respectively. In February 2004, we settled all of our fuel hedge contracts prior toespectively. In February 2004, we settled all of our fuel hedge contracts prior totheir scheduled settlement dates and none of our projected aircraft fuelheir scheduled settlement dates and none of our projected aircraft fuel

requirements for 2005 or thereafter.equirements for 2005 or thereafter.

The rules concerning derivatives are complex, but the idea is this: it is entirely likely thathe rules concerning derivatives are complex, but the idea is this: it is entirely likely that

working capital accounts contain embedded derivative instruments. In fact, the basic rule isorking capital accounts contain embedded derivative instruments. In fact, the basic rule is

that, if a derivative is a hedge whose purpose is to mitigate risk (as opposed to a hedge whosehat, if a derivative is a hedge whose purpose is to mitigate risk (as opposed to a hedge whose

purpose is to speculate), then the value of the hedge will impact theurpose is to speculate), then the value of the hedge will impact the carrying valuearrying valueof theof the

hedged asset. For example, if fuel oil is an inventory item for Delta, then derivatives contractsedged asset. For example, if fuel oil is an inventory item for Delta, then derivatives contractsmeant to lock-in future fuel oil costs will directly impact the inventory balance. Mosteant to lock-in future fuel oil costs will directly impact the inventory balance. Most

derivatives, in fact, are not used to speculate but rather to mitigate risks that the companyerivatives, in fact, are not used to speculate but rather to mitigate risks that the company

cannot control.annot control.

Delta's footnote above has good news and bad news. The good news is that as fuel prices rose,elta's footnote above has good news and bad news. The good news is that as fuel prices rose,
http://www.investopedia.com/terms/c/carryingvalue.asphttp://www.investopedia.com/terms/h/hedge.asphttp://www.investopedia.com/terms/f/fairvalue.asp


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Next:ext Financial Statements: Long-Lived Assetsinancial Statements: Long-Lived Assets

the company made some money on its fuel hedges, which in turn offset the increase in fuelhe company made some money on its fuel hedges, which in turn offset the increase in fuel

prices - the whole point of their design! But this is overshadowed by news which is entirelyrices - the whole point of their design! But this is overshadowed by news which is entirely

bad: Delta settled "all of [their] fuel hedge contracts" and has no hedges in place for 2005 andad: Delta settled "all of [their] fuel hedge contracts" and has no hedges in place for 2005 and

thereafter! Delta is thus exposed in the case of high fuel prices, which is a serious risk factorhereafter! Delta is thus exposed in the case of high fuel prices, which is a serious risk factor

for the stock.or the stock.

Summaryummary

Traditional analysis of working capital is defensive; it asks, "Can the company meet its short-raditional analysis of working capital is defensive; it asks, "Can the company meet its short-

term cash obligations?" But working capital accounts also tell you about the operationalerm cash obligations?" But working capital accounts also tell you about the operational

efficiency of the company. The length of the cash conversion cycle (DSO+DIO-DPO) tellsfficiency of the company. The length of the cash conversion cycle (DSO+DIO-DPO) tellsyou how much working capital is tied up in ongoing operations. And trends in each of theou how much working capital is tied up in ongoing operations. And trends in each of the

days-outstanding numbers may foretell improvements or declines in the health of theays-outstanding numbers may foretell improvements or declines in the health of the

business.usiness.

Investors should check the inventory costing method, and LIFO is generally preferred tonvestors should check the inventory costing method, and LIFO is generally preferred to

FIFO. However, if the LIFO reserve drops precipitously year over year, then the impliedIFO. However, if the LIFO reserve drops precipitously year over year, then the implied

inventory liquidation distorts COGS and probably renders the reported profit marginnventory liquidation distorts COGS and probably renders the reported profit margin

unusable.nusable.

Finally, it's wise to check the current accounts for derivatives (or the lack of them, when keyinally, it's wise to check the current accounts for derivatives (or the lack of them, when key

risks exist) and off-balance sheet financing.isks exist) and off-balance sheet financing.

OPTIONS & FUTURESPTIONS FUTURES

Introduction to Options Typesntroduction to Options TypesBy Ian Harveyy Ian Harvey

BONDS & FIXED INCOMEONDS FIXED INCOME

Investing For Safety and Income Tutorialnvesting For Safety and Income TutorialBy Brian Perryy Brian Perry

FUNDAMENTAL ANALYSISUNDAMENTAL ANALYSIS

Discounted Cash Flow Analysisiscounted Cash Flow AnalysisBy Ben McClurey Ben McClure

ECONOMICSCONOMICS

American Depositary Receipt Basicsmerican Depositary Receipt Basics

By Investopedia Staffy Investopedia Staff

INVESTING BASICSNVESTING BASICS

Stock Basics Tutorialtock Basics Tutorial

y Investopedia Staff

7. Financial Statements: Working Capital

8. Financial Statements: Long-Lived Assets

9. Financial Statements: Long-Term Liabilities

10. Financial Statements: Pension Plans

11. Financial Statements: Conclusion

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