Final answer:
The receivables turnover ratio measures how efficiently a company collects payments from its customers. A high ratio indicates efficient collection, while a low ratio suggests collection issues.
Step-by-step explanation:
The receivables turnover ratio measures how efficiently a company collects payments from its customers. It is calculated by dividing net credit sales by the average accounts receivable balance. A high receivables turnover ratio indicates that a company is able to collect payments quickly, which can be a positive sign of financial health.
Having a high receivables turnover ratio means that a company is able to convert its accounts receivable into cash quickly, which can improve cash flow and working capital. It also suggests that the company has good credit policies and is effectively managing its receivables.
On the other hand, a low receivables turnover ratio suggests that a company is taking longer to collect payments from its customers. This could indicate issues with credit management, such as extending credit to customers with poor payment histories, or inefficient collection processes. A low ratio may also imply that the company is carrying too much accounts receivable, which ties up cash that could be used for other purposes.