What does Receivables Turnover measure?

Receivables Turnover measures how efficiently a company uses its assets to collect cash from customers who have purchased on credit. Specifically, it indicates how many times a company can collect its average accounts receivable during a particular period, typically a year.

The formula for Receivables Turnover is Sales divided by Accounts Receivable. This reveals not just the speed at which receivables are collected, but also how effective the company is at managing its credit policies and collections process. A higher ratio suggests more efficient collection practices and indicates a company is quickly converting its credit sales into cash, which is crucial for maintaining liquidity and funding operations.

In contrast, the other options represent different financial metrics: one measures profitability, another reflects the relationship between assets and liabilities, and the last one focuses on the relationship between sales and the cost of goods sold, none of which pertain directly to the effectiveness of a company in collecting receivables.