Receivables Turnover Ratio: Definition, Calculation & Importance

Receivables turnover ratio is a financial metric that is used to gauge the effectiveness of a company to offer credit and collect the money that it is owed. This ratio is calculated by taking the net credit sales of the company and dividing it by average accounts receivable for a specific amount of time. 

When a business gets in the habit of allowing accounts receivables to add up, they are essentially providing loans to their customers, without earning interest,

Why it is Important

If you are an investor, you should pay special attention to the receivables turnover. This can tell you vital information about how efficient the company is and whether you should continue investing in them. If a company has a high ratio, it tells you that they extend very little credit, or they are very good at collecting the money that is owed to them by customers. If the ratio is very low, this will tell you that the company extends a lot of credit and is not very good at collecting its debts.

If a company is unable to properly collect their account receivables, they can get into serious financial problems.