Efficiency ratios and the cash conversion cycle
Nike's receivables jumped a quarter on flat sales. Work out the days, follow the cash, and find what's really inside the number.
FinanceReading the accounts like an analystAbout 9 min: 9 readingUpdated
General education, not financial advice.
- Calculate asset turnover and inventory, receivable and payable days
- Work out the cash conversion cycle and what a change in it means for cash
- Separate a real change in how customers pay from a one-off item inside the balance
Builds toward: Judge a company. Read a company's accounts, apply Graham's tests, and make a rough valuation.
Reading the accounts like an analyst: lesson 4 of 5
- Reading the accounts like an analyst
- The three statements and how they link 10 min
- Common-size statements and trends 9 min
- Profitability ratios: margins, ROA and ROE 9 min
- Efficiency ratios and the cash conversion cycle 9 min
- DuPont analysis: where ROE comes from 10 min
Pairs with any financial statement analysis text (the chapters on asset utilisation and short-term liquidity)
Mission
From: a senior analyst on the consumer team Due: Thursday
Nike's receivables went up 26% last year while sales were flat. On a screen that looks like customers paying late, or sales being pushed into stores. Run the working-capital numbers from the 10-K for the year to 31 May 2026 (filed 15 July 2026) and tell me in a short note whether this is a warning sign.
Find the figures yourself. Open the 10-K on the SEC's EDGAR site (search "NIKE, Inc.", filing type 10-K) and note, for both 31 May 2025 and 31 May 2026:
- from Item 8, the consolidated statements of income: revenues and cost of sales;
- from Item 8, the consolidated balance sheets: accounts receivable, inventories, accounts payable and total assets;
- from Item 7, the MD&A: how revenues split between NIKE Brand wholesale and NIKE Direct, and anything the company says about what sits inside accounts receivable.
Write down where each figure came from; your note should cite it.
What it is
The toolkit for this job.
Asset turnover = revenue ÷ average total assets: how much is sold for each unit of assets.
Working-capital days follow cash through the business:
- Inventory days = inventory ÷ cost of sales × 365: how long stock sits.
- Receivable days = receivables ÷ revenue × 365: how long customers take to pay.
- Payable days = payables ÷ cost of sales × 365: how long the company takes to pay suppliers.
- Cash conversion cycle = inventory days + receivable days − payable days: roughly how long the company's own cash is tied up between paying for stock and being paid for it.
Stock and supplier bills are recorded at cost, so compare them with cost of sales; receivables are at selling price, so compare them with revenue. Averages of opening and closing balances are best for a year's ratio; to compare two year-end positions, as here, year-end balances are fine if you say so.
Questions an analyst asks
- Who owes this money: customers, or someone else?
- Did the mix of customers change: more who buy on credit?
- Is anything one-off inside the balance, or inside cost of sales?
- What would the days be without it, and is that still a change worth watching?
Why it matters
Two companies with the same margin earn very different returns if one turns its assets over faster, and working capital is where profit and cash part company. Receivables growing faster than sales is one of the classic early signs of trouble, from weak customers to revenue booked too early, so analysts check it every time. But it has innocent causes too, and a wrong alarm costs credibility.
Worked example
Harbour Tools, an imaginary wholesaler (thousands): revenue 2,000; cost of sales 1,300; average total assets 1,500; average inventory 260; average receivables 200; average payables 130.
- Asset turnover = 2,000 ÷ 1,500 ≈ 1.33
- Inventory days = 260 ÷ 1,300 × 365 = 73
- Receivable days = 200 ÷ 2,000 × 365 = 36.5
- Payable days = 130 ÷ 1,300 × 365 = 36.5
- Cash conversion cycle = 73 + 36.5 − 36.5 = 73 days
If Harbour cut inventory days to 60 at the same cost of sales, average stock would be about 1,300 × 60 ÷ 365 ≈ 214, releasing about 46 of cash.
Common mistake
Dividing inventory and payables by revenue instead of cost of sales, or taking the receivables line as "money customers owe" without reading the note. Companies' receivables can include supplier rebates, tax refunds, insurance claims and other non-customer amounts.
More detail: other things that move these ratios
- Seasonal year ends. A retailer's stock at a quiet year end may be far below its average during the year.
- Factoring and supplier finance. Selling receivables to a bank shrinks receivables; arrangements that let a company pay suppliers later through a bank lengthen payable days. US GAAP (from 2023) and IFRS (from 2024) require companies to disclose supplier finance arrangements.
- Unusual items in cost of sales. A one-off credit in cost of sales (like Nike's tariff benefit) lowers the denominator and nudges inventory and payable days up.
Key terms
- asset turnover
- revenue ÷ average total assets
- inventory days
- inventory ÷ cost of sales × 365
- receivable days
- receivables ÷ revenue × 365
- payable days
- payables ÷ cost of sales × 365
- cash conversion cycle
- inventory days + receivable days − payable days
- wholesale
- selling to other businesses (here, retailers), usually on credit
Practise the key terms
Tap a card to turn it over. 6 cards.
| Front | Back |
|---|---|
| asset turnover | revenue ÷ average total assets |
| inventory days | inventory ÷ cost of sales × 365 |
| receivable days | receivables ÷ revenue × 365 |
| payable days | payables ÷ cost of sales × 365 |
| cash conversion cycle | inventory days + receivable days − payable days |
| wholesale | selling to other businesses (here, retailers), usually on credit |
Task
Write the senior analyst a short note:
- a table of inventory, receivable and payable days and the cash conversion cycle for both year ends;
- receivable days with and without the tariff receivable;
- what explains the rest of the rise;
- your verdict on whether it's a warning sign, and what you'd check next.
Model answer
Show the model answer
| Days (year-end balances) | 2025 | 2026 |
|---|---|---|
| Inventory | 103.1 | 103.4 |
| Receivables | 37.2 | 46.7 |
| Payables | 47.9 | 49.6 |
| Cash conversion cycle | 92.4 | 100.4 |
Where the figures are: revenues 46,309 and 46,398 and cost of sales 26,519 and 26,487 from the consolidated statements of income; receivables 4,717 and 5,931, inventories 7,489 and 7,501, payables 3,479 and 3,600, total assets 36,579 and 38,410 from the consolidated balance sheets; wholesale (25.9 to 27.5 billion) and Direct (18.8 to 17.7 billion) from the MD&A overview; the 986 million tariff benefit and the 684 million receivable from the MD&A section on IEEPA tariffs.
Workings: 2026 receivables 5,931 ÷ 46,398 × 365 = 46.7; inventory 7,501 ÷ 26,487 × 365 = 103.4; payables 3,600 ÷ 26,487 × 365 = 49.6. Without the tariff receivable: (5,931 − 684) ÷ 46,398 × 365 = 41.3 days. Asset turnover for the year, on average assets: 46,398 ÷ 37,494.5 = 1.24.
Nike: the jump in receivables is mostly not a customer problem · Source: Form 10-K, year to 31 May 2026
Receivables rose 26% on flat revenue, taking receivable days from 37 to 47. About half of the rise is a one-off: 684 million of the balance is tariff money owed by the US government after the Supreme Court's IEEPA ruling, which Nike says it has since received. Without it, receivable days are 41.3.
Much of the rest fits the sales mix. Wholesale revenues rose by 1.6 billion and Nike's own Direct channel fell by 1.1 billion. Retailers buy on credit; Direct shoppers pay at once. Shifting sales towards wholesale raises receivables even if every customer pays on time; the remaining rise in days is worth watching.
Stock is steady: inventory days are flat at about 103 (about 100 if the tariff benefit is taken out of cost of sales, because the benefit lowered the denominator). The cash conversion cycle lengthened by about 8 days, mostly from receivables.
Verdict: not a warning sign on this evidence, but worth watching. What would change my view: receivable days still above about 41 once the tariff money is collected; a rise in overdue balances or the allowance for bad debts; or wholesale sales growing on longer credit terms. Next: the receivables note and the quarterly 10-Qs.
How the expert gets there. They calculate the days, then refuse to stop at the ratio. Reading the notes, they find the tariff receivable inside the line, and they check the sales mix to see who the customers are. They notice that the same one-off also touched cost of sales. Then they give a verdict that says how confident they are and what would change it.
What a reviewer would flag:
- Calling it "channel stuffing" without evidence; that's an accusation.
- Missing the 684 million: the single biggest fact in the note.
- Using revenue to work out inventory days (it gives about 59 days instead of 103).
- A verdict with no "what would change my mind".
Practice
Transfer: a jump with no explanation given. A credit screen flags Lowe's: receivables rose from 94 million to 1,090 million in the year to 30 January 2026, while net sales grew 3.1% (83,674 to 86,286 million). Receivable days went from about 0.4 to 4.6. Open Lowe's 10-K. In three sentences: is this a warning sign, and what would change your mind?
A model answer
Not a sign that existing customers are paying late: the receivables came with two businesses Lowe's bought. The acquisitions note allocates 912 million of receivables to Foundation Building Materials (bought October 2025) and 202 million to Artisan Design Group (June 2025), 1,114 million in all, more than the whole increase; FBM offers trade credit to professional customers and ADG serves home builders and property managers, unlike Lowe's stores, where shoppers pay at the till or on credit cards run by a bank (Synchrony), which stay off Lowe's receivables. What would change my mind: receivables growing faster than the acquired businesses' sales next year, or a rising allowance for credit losses on them; and note that a full year of their sales will make the days look different again.
How the expert gets there: a tenfold jump is too big to be customers slowing down; they look for an event that added a new kind of customer, and find it in the purchase price allocation.
What a reviewer would flag: calling it late payment without reading the notes; ignoring that the acquired businesses were owned for only part of the year, which distorts the days.
In short
- Asset turnover: revenue ÷ average total assets.
- Inventory and payable days use cost of sales; receivable days use revenue.
- Cash conversion cycle = inventory days + receivable days − payable days.
- Receivables growing faster than sales: check the note, the sales mix and one-offs before calling it a warning.
- Give a verdict with what would change it.
Check yourself
Answer in your head first, then open the answer. Nothing is saved.
Inventory 45 days, receivables 30 days, payables 50 days. What is the cash conversion cycle?
Show answer
25 days.
A company moves sales from its own shops to department stores that pay in 60 days. What happens to receivable days, and is that a warning sign?
Show answer
They rise, because more sales are on credit. On its own it's a change in mix, not a sign of trouble; check that the new customers pay on their terms.
Why does a one-off credit in cost of sales push up inventory days?
Show answer
Inventory days divide stock by cost of sales; a credit lowers cost of sales, so the same stock looks like more days.
Further reading
- NIKE, Inc., Form 10-K for the year ended 31 May 2026 (SEC EDGAR): balance sheet, MD&A and the note on IEEPA tariffs.
- FASB, Accounting Standards Update 2022-04, Liabilities: Supplier Finance Programs; IFRS Foundation, "Supplier Finance Arrangements" (amendments to IAS 7 and IFRS 7, May 2023).
- On this site: Profitability ratios: margins, ROA and ROE.
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