Receivable Turnover Ratio

Definition

The receivable turnover ratio (debtors turnover ratio, accounts receivable turnover ratio) indicates the velocity of a company's debt collection, the number of times average receivables are turned over during a year. This ratio determines how quickly a company collects outstanding cash balances from its customers during an accounting period. It is an important indicator of a company's financial and operational performance and can be used to determine if a company is having difficulties collecting sales made on credit.

Receivable turnover ratio indicates how many times, on average, account receivables are collected during a year (sales divided by the average of accounts receivables). A popular variant of the receivables turnover ratio is to convert it into an Average collection period in terms of days. The average collection period (also called Days Sales Outstanding (DSO)) is the number of days, on average, that it takes a company to collect its accounts receivables, i.e. the average number of days required to convert receivables into cash.

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.

Calculation (formula)

Receivables turnover ratio = Net receivable sales/ Average accounts receivables

Accounts Receivable outstanding in days:

Average collection period (Days sales outstanding) = 365 / Receivables Turnover Ratio

Norms and Limits

There is no general norm for the receivables turnover ratio, it strongly depends on the industry and other factors. The higher the value of receivable turnover the more efficient is the management of debtors or more liquid the debtors are, the better the company is in terms of collecting their accounts receivables. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. But in some cases too high ratio can indicate that the company's credit lending policies are too stringent, preventing prime borrowing candidates from becoming customers.

Exact formula in the ReadyRatios analytic software

Average collection period = ((F1[b][TradeAndOtherCurrentReceivables] + F1[e][TradeAndOtherCurrentReceivables])/2)/(F2[Revenue]/NUM_DAYS)

Receivables turnover ratio = 365 / Average collection period

F2 – Statement of comprehensive income (IFRS).
F1[b], F1[e] - Statement of financial position (at the [b]eginning and at the [e]nd of the analizing period).
NUM_DAYS – Number of days in the the analizing period.