Torpedo Ratio

Briefing by: Christopher R. McCall Earnings Performance Stock Price Performance Data Source: Article by Claudia Mott Prudential Securities

Torpedo Ratio Tool used to measure hidden financial trends that can spell trouble for a stock…even while earnings look good!

Torpedo Ratio Two ratios can measure the extent to which inventories and accounts receivable increase compared to sales growth On a company balance sheet, inventories include anything from raw materials to unfinished products to goods ready for shipment Accounts receivable measures the amount of outstanding bills the company has to collect from customers Both are considered assets -- which are good -- but they shouldn’t be growing faster or slower than sales

Torpedo Ratio Professional investors believe that when inventories and accounts receivable build up relative to sales, it may be a sign of trouble This could be used as a good sell signal for companies regardless of how small or large they are

Calculating Torpedo Ratio Calculate the torpedo ratio by dividing the amount of inventory (or accounts receivable) for the most recent quarter, by the trailing twelve months of sales Then take the amount of inventories (or accounts receivable) from the quarter a year before, and divide by its trailing twelve months of sales The two ratios should be about equal (as close to 1 as possible)

Calculating Torpedo Ratio Example: XYZ Corp. = Accounts Rec. $60 (mil) Trailing Sales $200 (mil) Q’00 2Q’99 = Trailing Sales $100 (mil) Accounts Rec. $20 (mil) =1.50 Receivables have outgrown sales