ACCOUNTS RECEIVABLE TURNOVER
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