Financial Education

Accounts Receivables Turnover is a close cousin to the Inventory Turnover ratio. It can be used to determine whether the company is having trouble collecting on sales it provided customers on credit.

To compute Accounts receivable turnover, divide sales made on credit by average accounts receivable. Since many companies do not disclose how much of the sales were made on credit, investors often use total sales as a shortcut. When this is done, it is important to remain consistent if the ratio is compared to that of other companies. Comparing one company’s credit-based sales to another’s total sales would be highly misleading.

Let’s look at Plantronics’ data from their 10K for fiscal year 2006 (their fiscal year ends in March.)
Using total sales in the numerator, Plantronics has accounts receivable turnover of 7.3x. Just as with inventory turnover, we can translate this into days by dividing it into 365: 365/7.3 = 50. This number is known as Days Sales Outstanding (DSO.) It represents the average amount of time that elapses after a sale is made before Plantronics collects the proceeds from its customers.

For more information, see all articles on: Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Security Selection

See also:

Activity Ratios

Accounts Payable Turnover and Days Payable

The Cash Cycle

Asset Turnover

Allowance for Doubtful Accounts