RecognizingSuccess 131losses from such damaged books (though they have the right to re-
turn damaged books to publishers, the result is often a lower dis-
count on purchases from them). These characteristics of low asset
intensity are extremely favorable to Amazon.com, though it remains
a har dbusiness to assess given its relative youth an dnegative earn-
ings.
THE FULL TOOL CHEST
This tool chest of ideas helps you assess a company’s liquidity, effi-
ciency, an dperformance. The tools can be a dapte dfrom the basic
metrics outlined here to deal with special situations and more ad-
vance danalysis.
A few examples of measures that help further gauge various as-
pects of a company’s relative an dprobable future success are as
follows.Quality of income(cash flows provided by operating activi-
ties divided by operating income) tells you what portion of income
is actually turning into cash to gauge the liquidity position. The
amount of annualdepreciation expensecan be a goo dproxy for fu-
ture capital investment needs. Sales per employeehelps evaluate
overall productivity.
A company’s key ratios vary with time, an dany tren ds are im-
portant guides to managerial efficiency and performance. Therefore,
you might look at all the expenses on the income statement over
several years. There is no reason to automatically assume that any
particular ratio or trends will continue, but history does help define
probabilities for the future.
Suppose, for example, you see a large reduction in an expense
for research an d development. That woul dsignificantly increase in-
come in a period. But growth in income resulting from the reduction
in such an expense woul dnot mean that the business is being man-
age dmore efficiently. It coul deven mean that there are reasons to
worry about its prospects for growth in the future.
Or take receivables turns. Suppose the average number of col-
lection days during a period increases materially in relation to the
credit terms. Maybe part of any sales growth during the period is
due to a relaxation in credit collection policies rather than to busi-
ness efficiency. If those accounts are more likely to go uncollected,
the sales growth might look goo dto day but there’ll be hell to pay
tomorrow.