Receivables Turnover Ratio Essay
nterpreting 'Receivables Turnover Ratio' A high receivables turnover ratio can imply a variety of things about a company. It may suggest that a company operates on a cash basis, for example. It may also indicate that the company’s collection of accounts receivable is efficient, and that the company has a high proportion of quality customers that pay off their debts quickly. A high ratio can also suggest that the company has a conservative policy regarding its extension of credit. This can often be a good thing, as this filters out customers who may be more likely to take a long time in paying their debts. On the other hand, a company’s policy may be too conservative if it is too tight in extending credit, which can drive away potential customers …show more content…
Though this offers important insight, it does not tell the whole story. For example, if one were to track a company’s receivables turnover ratio over time, it would say much more about the company’s history with issuing and collecting on credit than a single value can. By looking at the progression, one can determine if the company’s receivables turnover ratio is trending in a certain direction or if there are certain recurring patterns. What is more, by tracking this ratio over time alongside earnings, one may be able to determine whether a company’s credit practices are helping or hurting the company’s bottom …show more content…
Companies of different sizes may often have very different capital structures, which can greatly influence turnover calculations, and the same is often true of companies in different industries. The receivables turnover ratio is not particularly useful in comparing companies with significant differences in the proportion of sales that are credit, as determining the receivables turnover ratio of a company with a low proportion of credit sales does not indicate much about that company’s cash flow. Comparing such companies with those that have a high proportion of credit sales also does not usually indicate much of
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