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Channel Stuffing
Q What does it mean when a company is said to be "stuffing the channel"?

- J.E., Elizabeth City, N.C.

A When a company stuffs the channel, it ships inventory ahead of schedule, filling its distribution channels with more products than are needed. Since companies often record sales as soon as they ship products, channel-stuffing can make it appear that business is booming. But if the products are not sold, they may end up being returned to the manufacturer. So sales already claimed may never occur.

To sniff out channel-stuffing, see if a company's accounts receivable growth is outpacing sales growth. If so, that's a red flag. Alternatively, calculate its "days sales outstanding" (DSO). First, divide the last four quarters' revenues by 365. Then divide accounts receivable by the number you got. This reveals how many days worth of sales is represented by the current accounts receivable. Between 30 and 45 days is typical. You can also follow the same process for the last quarter, dividing last quarter's revenues by 91.25 (days in a quarter, on average).

A company with a low DSO is getting its cash back quicker and, ideally, putting it immediately to use, getting an edge on the competition. Rising numbers can signify channel stuffing. Remember that this doesn't work for all companies. Restaurants and other cash-based businesses, for example, aren't going to have much, if any, receivables.

Q What simple books can teach me stock investing?

- R.T., Salinas, Calif.

A Books by Peter Lynch are great for beginners, and you can also learn a lot at the www.fool.com and www. morningstar.com Web sites. When you're ready to open a brokerage account, visit www.broker.fool.com and www.sec.gov/ investor/brokers.htm for more info.

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