Receivables Turnover

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What is Receivables Turnover?

Receivables Turnover measures how efficiently a company collects its accounts receivable, calculated as credit sales divided by average accounts receivable.

How do you interpret Receivables Turnover?

Receivables Turnover shows how efficiently a company collects its accounts receivable, calculated as credit sales divided by average accounts receivable, reflecting liquidity and credit policies.

How to Calculate Receivables Turnover?

Receivables Turnover is calculated by dividing the company’s total revenue by the average accounts receivable over a period.

Receivables Turnover = Revenue / Average Accounts Receivable

where

• Revenue: The total income generated by the sale of goods or services.
• Average Accounts Receivable: The average amount of receivables over the period, calculated as the sum of the beginning and ending accounts receivable balances divided by two.

Why is Receivables Turnover important?

This ratio is important because it shows how well a company is managing its credit and collections. A high turnover indicates efficient management, while a low ratio could signal poor collection practices, which may lead to liquidity issues.

How does Receivables Turnover benefit investors?

Investors use Receivables Turnover to gauge the efficiency of a company's credit policies and its ability to manage liquidity. A higher ratio indicates that the company has a steady cash inflow from its receivables, reducing the need for external financing.

Using Receivables Turnover to Evaluate Stock Performance

A high Receivables Turnover ratio generally indicates good liquidity, making the company more financially stable. This stability can be attractive to investors and may positively influence stock performance.

FAQ about Receivables Turnover

What is a Good Receivables Turnover?

A good Receivables Turnover ratio depends on the industry, but a higher ratio is generally better. Ratios above 10 are often considered strong, indicating that the company collects receivables efficiently.

What Is the Difference Between Metric 1 and Metric 2?

Receivables Turnover measures how many times receivables are collected in a period, while DSO converts that information into the number of days it takes to collect receivables. Both provide insights into receivables management, but DSO focuses more on the timing.

Is it bad to have a negative Receivables Turnover?

Yes, a low Receivables Turnover ratio can indicate that the company is struggling to collect payments from customers. This may result in cash flow issues and indicate poor credit or collection policies.

What Causes Receivables Turnover to Increase?

The ratio decreases when the company’s average receivables increase faster than revenue, often due to lenient credit policies, slower collections, or customer payment delays.

What are the Limitations of Receivables Turnover?

Receivables Turnover does not account for the quality of the receivables. It may mask problems such as aging receivables or bad debts. Additionally, it doesn't provide insights into specific collection practices or the aging of receivables.

When should I not use Receivables Turnover?

This ratio may be less useful in industries where cash sales dominate or where credit terms are short. It is also less relevant for companies with erratic or seasonal sales patterns.

How does Receivables Turnover compare across industries?

Different industries have different benchmarks for Receivables Turnover. For example, industries with longer sales cycles, such as heavy manufacturing, typically have lower ratios, while retail or service industries may have higher turnover .

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