The accounts receivable turnover ratio indicates how many times, on average, accounts receivables are collected during a year.
The accounts receivable turnover ratio works with the average collection period ratio to determine the quality of a firm's receivables and the efficiency of the firm's collection and credit policies.
The accounts receivable turnover ratio is calculated as follows:
Net Sales/Accounts Receivable = # Times
The net sales figure is taken off the firm's income statement and the accounts receivable figure is taken off the firm's balance sheet. The result, number of times, is the number of times, each year, the firm's accounts receivables are collected or "cleaned up."
Interpretation: A high turnover ratio is generally a good thing since it means that customers are paying their bills on time. If the turnover ratio is too high as compared to the industry the company is in, it may mean, however, that the company is too restrictive in its credit and collection policies and not extending credit to enough customers.
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