Summary:

Sometimes, something so complicated can be so simple bq. For Douglas Foreman, co-manager of TCW Galileo Aggressive Growth Equities fund, the hunt for danger begins with the balance sheet. “The balance sheet leads the income statement, especially on the way down, by six to 12 months,” […]

Sometimes, something so complicated can be so simple

bq. For Douglas Foreman, co-manager of TCW Galileo Aggressive Growth Equities fund, the hunt for danger begins with the balance sheet. “The balance sheet leads the income statement, especially on the way down, by six to 12 months,” he says. Foreman pays particular attention to days’ sales outstanding, or total receivables divided by total sales, times the number of days in a quarter. The calculation measures the number of days it takes to collect on receivables. If DSO is rising, it could mean a company is stuffing products through its sales channel, or becoming aggressive at recognizing revenue. Sometimes there are good explanations for a rise in DSO, such as a growing proportion of sales from overseas. Still, “it’s pretty rare that a company blows up out of the blue,” Foreman says. [Barron's]

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