Accounts Receivable Turnover and Dso

ACCOUNTS RECEIVABLE TURNOVER AND DSO

Accounts Receivables Turnover is a close cousin to the Inventory Turnover ratio. It can be used to determine whether the company is having trouble collecting on sales it provided customers on credit.

To compute Accounts receivable turnover, divide sales made on credit by average accounts receivable. Since many companies do not disclose how much of the sales were made on credit, investors often use total sales as a shortcut. When this is done, it is important to remain consistent if the ratio is compared to that of other companies. Comparing one company’s credit-based sales to another’s total sales would be highly misleading.

Let’s look at Plantronics’ data from their 10K for fiscal year 2006 (their fiscal year ends in March.)

Using total sales in the numerator, Plantronics has accounts receivable turnover of 7.3x. Just as with inventory turnover, we can translate this into days by dividing it into 365: 365/7.3 = 50. This number is known as Days Sales Outstanding (DSO.) It represents the average amount of time that elapses after a sale is made before Plantronics collects the proceeds from its customers.

For more information, see all articles on: Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Security Selection

Accounts Receivable Turnover Definition¶

Accounts receivable Turnover ratio indicates how many times the accounts receivable have been collected during an accounting period. It can be used to determine if a company is having difficulties collecting sales made on credit. The higher the turnover, the faster the business is collecting its receivables. It can be expressed in many forms including accounts receivable turnover rate, accounts receivable turnover in days, accounts receivable turnover average, and more.

Accounts Receivable Turnover Meaning¶

Accounts receivable turnover measures how efficiently a company uses its asset. It is an important indicator of a company's...