Receivables Turnover Ratio

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Definition

The receivable turnover ratio quantifies a company's ability to collect liabilities/debts. It helps investors gauge the efficiency of a company's collection and credit policies.

A high ratio value indicates an efficient and effective credit policy, and a low ratio indicates a debt collection problem.

The way to read the receivables turnover ratio is as follows. Assume that a company has a receivables turnover ratio of 10. We say that "the company turns over its receivables 10 times during the year." In other words, on average the company collects its outstanding receivables 10 times per year.

Formula

Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Average Accounts Receivable = (Accounts Receivable at the beginning of the period + Accounts Receivable at the end of the period)/2

(Note: YCharts calculates this ratio as (Trailing Twelve Month Total Sales / Accounts Receivable from the most recent quarter))

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