Download Torpedo Ratio

Torpedo Ratio
Earnings
Performance
Stock Price
Performance
Torpedo Ratio
Data Source: Article by Claudia Mott
Prudential Securities
Briefing by:
Christopher R. McCall
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.
2Q’00
Accounts Rec. $60 (mil)
= 0.30
Trailing Sales $200 (mil)
2Q’99
0.30
0.20
Accounts Rec. $20 (mil)
= 0.20
Trailing Sales $100 (mil)
= 1.50
Receivables
have outgrown
sales