Account Receivable Turnover indicates how many times the company is able to collect the money from its customer in the given year.
Debtor’s Ratio = Revenue / Average Recievablr
Company ABC makes Total sales of Rs 100 Cr and the Average money to be collected from the customer (or average receivable) is Rs 20. Then, the Account Receivable turnover ratio is 5.
Company ABC is able to collect money from its customer 5 times a year or once is every 2.4 months. (12/5).
How to use practically
The accounts receivable turnover ratio, also known as the debtor’s turnover ratio, is an efficiency ratio that measures how efficiently a company is collecting revenue – and how efficiently it is using its assets
A high ratio is desirable, as it indicates that the company’s collection of accounts receivable is frequent and efficient. A high accounts receivable turnover also indicates that the company has a very good and high-quality customer base that is able to pay money quickly. Also, a high ratio can suggest that the company follows a conservative credit policy.
On the other hand, a low accounts receivable turnover ratio suggests that the company’s collection process is poor. This can be due to the company extending credit terms to non-creditworthy customers who may be experiencing financial difficulties.
It’s useful to compare a company’s ratio to that of its competitors or similar companies within its industry. Looking at a company’s ratio, relative to that of similar firms, will provide a more meaningful analysis of the company’s performance rather than viewing the number in a standalone manner