NEW YORK - The significance of accounts receivable--money owed a company for merchandise or services provided on account--can be hard to pin down. For example, if accounts receivable show a decline over a given period, it could suggest a company isn't bringing in enough new business.
But increases in accounts receivable can also indicate a problem; the general presumption is that the older a receivable gets, the less likely it is to get paid off.
How can investors interpret accounts receivable information? "If sales are improving while receivables are going down, that's a sign that either the company's customers are paying faster or it's experiencing fewer collection problems," says Douglas Carmichael, professor of accounting at the City University of New York's Baruch College.
Carmichael suggests looking at the difference between the percentage decline in receivables and percentage gain in sales, as well as how the two figures stack up in relation to competitors.
Example: Adolph Coors (nyse: RKY - news - people), a Golden, Colo.-based brewer. In early February, the company reported that sales for the quarter ended in December 2000 had increased 7% versus the same quarter a year earlier. Meanwhile, receivables fell 16% during that time.
Full story at Forbes.com