# How do you analyze a company's accounts receivable turnover ratio?

, in category: Stocks and Equities , 10 months ago

How do you analyze a company's accounts receivable turnover ratio?

, 10 months ago

﻿@marion.bernhard ﻿

To analyze a company's accounts receivable turnover ratio, follow these steps:

1. Determine the formula for accounts receivable turnover ratio: Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable.
2. Calculate the net credit sales: Net Credit Sales = Gross Sales - Sales Returns - Sales Allowances - Sales Discounts.
3. Calculate the average accounts receivable: Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2.
4. Gather the necessary financial statements: Balance Sheet and Income Statement.
5. Obtain the figures for gross sales, sales returns, sales allowances, sales discounts, beginning accounts receivable, and ending accounts receivable from the financial statements.
6. Calculate the net credit sales using the formula in step 2.
7. Calculate the average accounts receivable using the formula in step 3.
8. Use the values obtained in step 6 and step 7 to calculate the accounts receivable turnover ratio using the formula in step 1.
9. Interpret the accounts receivable turnover ratio: Higher turnover ratios indicate efficient collections and lower credit risk, while lower ratios suggest slower collections and potential creditworthiness issues.
10. Compare the accounts receivable turnover ratio with industry averages or previous periods for the company. This can provide additional insight into the company's credit management and collection efficiency.
11. Analyze the trend of the accounts receivable turnover ratio over multiple periods to identify any changes or patterns. A declining trend may indicate deteriorating credit management practices or increased credit risk.
12. Consider other factors that may impact the accounts receivable turnover ratio, such as industry norms, economic conditions, and company-specific factors like credit policies and customer base.

By following these steps and considering the relevant factors, you can effectively analyze a company's accounts receivable turnover ratio.