Receivables Turnover Ratio Definition & Meaning | Fundamental Analysis | CSIMarket
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Glossary

Receivables Turnover Ratio

Fundamental Analysis

The Receivable Turnover Ratio is a financial metric used in Fundamental Analysis to evaluate the efficiency of a company*s credit policies and its ability to collect payments on accounts receivable. It is an indication of the effectiveness of a company*s credit policy and how quickly it is able to collect payments from customers.

The formula for Receivable Turnover Ratio is:

Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Where Net Credit Sales is the total credit sales minus any sales returns, discounts, or allowance, and Average Accounts Receivable is the average of beginning and ending accounts receivable for the period.

A higher Receivable Turnover Ratio indicates that a company has an effective credit policy and can collect payments quickly, which is a good sign of its financial soundness. However, an excessively high ratio may indicate that the company is too strict in its credit policy and may be missing out on potential sales. On the other hand, a low ratio may suggest that the company is experiencing difficulties in collecting payments from customers, which may be a warning sign of financial distress.

Overall, the Receivable Turnover Ratio is a useful tool for investors, financial analysts, and other stakeholders to evaluate a company*s overall financial health and assess its credit policies.




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