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Accounts receivable turnover ratio is a measure of the liquidity of a company's AR asset. Typically, the higher the turnover is, the more favorable it is. An interesting counter argument to the preceding statement is that a too high an account receivable turnover ratio may point to an overly restrictive credit policy and that good sales may be lost impacting the overall health and organic growth of the company.
As a measure, only credit sales are used in the calculation. If all sales are included and there is a measurable amount of cash sale, the calculation will not be true and can be vary misleading. Also, if calculating the account receivable turnover ratio on an intra-period basis you need to account for the period (generally the ratio equation is used for a year-to-year calculation). The accounts receivable turnover ratio is also known as the sales-to-receivable ratio.
The formula for accounts receivable turnover is:Account receivable turnover = total credit sales / average accounts receivable balance
Example:
AMERISOURCEBERGEN CORPORATION sales for its fiscal year ended September 30, 2007 were $66,074,312,000 and Accounts receivable, net for the years ended Sept. 30, 2007 and 2006 were $3,468,199,000 and $3,427,139,000 respectively. AmerisourceBergen's account receivable turnover was:
66,074,312 / (3,468,199 + 3,427,139) / 2 which equates to 19.2 times. This is indicative of the wholesale pharmacy business which is typically a 15 day pay.
Now a quarterly look at AmerisourceBergen's accounts receivable turnover:Sales for its fiscal fourth quarter ended September 30, 2007 were $16,390,450,000 and Accounts receivable, net for June 30, 2007 and Sept. 30, 2007 were $3,549,026,000 and $3,468,199,000 respectively. AmerisourceBergen's account receivable turnover for the quarter was:
16,390,450 / (3,468,199 + 3,549,026) / 2 which equates to 4.7 times - annualize would be multiple by 4 = 18.7 times.
As can be seen there was a slight decline in the accounts receivable turnover in the fourth quarter.
