Final answer:
The debtor days ratio measures the average number of days it takes for a company to collect payment from its debtors, indicating how effectively the company is managing its accounts receivable.
Step-by-step explanation:
The debtor days ratio, also known as days sales outstanding (DSO), is a financial metric used to assess how effectively a company is managing its accounts receivable. Specifically, it measures the average number of days that a company takes to collect payment from its debtors after a sale has been made. This is important as it indicates the liquidity of the company's receivables and can impact the company's cash flow.
To calculate the debtor days ratio, one would take the average accounts receivable balance and divide it by the total net credit sales, and then multiply that figure by the number of days in the period being analyzed. A lower debtor days ratio indicates that the company is more efficient at collecting its debts. It is a critical component of working capital management and cash flow analysis.