What does the accounts receivable turnover ratio measure?

The accounts receivable turnover ratio measures how effectively a company is able to collect cash from its credit sales. This ratio is calculated by dividing net credit sales by average net accounts receivable.

A high turnover ratio indicates that the company is efficient in managing its receivables and is able to collect payments more quickly from customers who have purchased on credit. This is crucial for maintaining positive cash flow and ensuring the company can meet its short-term obligations. Additionally, tracking this ratio over time can provide insights into the company's credit policy and the effectiveness of its collections strategy.

Understanding this ratio helps stakeholders gauge how well the company utilizes its assets, particularly its receivables—making it a vital tool for assessing overall financial health and operational efficiency.