Accounts receivable turnover and inventory turnover are two important ratios used by analysts to measure how efficiently a firm is paying its bills, collecting cash from customers, and turning inventory into sales. These two ratios appear in the current assets category of a business's balance sheet.

Accounts Receivable Turnover

Accounts receivable turnover, or A/R turnover, is calculated by dividing a firm's sales by its accounts receivable. It is a measure of how efficiently a company can collect on the credit it extends to customers. A firm that is very good at collecting on its credit will have a higher accounts receivable turnover ratio. It is also important to compare a company's ratio with its industry 🦄peers to gauge whether its ratio is on par.

Inventory Turnover

澳洲幸运5官方开奖结果体彩网:Inventory turnover measures how efficiently a company turns its inventory into sales. It is calculated by taking the cost of goods sold (COGS) and dividing it by average inventory. Sometimes, sales are used instead of COGS. Again, a higher number is better as it indicates that a company is quite efficient at selling off its inventory more often rather than storing it for longer periods becaus🌳e its products are not selling.

Analyzing inventory turnover൩♏ helps an investor decide if a company is effectively managing its inventory.

Why Turnover Metrics Are Important

Investors researching businesses that extend credit or that have physical inventory will benefit from analyzing their accounts receivable and inventory turnover ratios. These turnover ratios should be compared with a company's previous periods because they will not indicate much on their own.

Also, industry averages should be noted, as well as those of competitors 𝓡and similar businesses, to gauge whether a business is doing better, is on par with, or is do💜ing worse than others.

Accounts Receivable

Accounts receivable turnover is important when companies extend credit to clients for a purchase (note that clients 𝔉can be other businesses). There are very few industries that operate only on cash; most companies have to deal with credit as well. Howev🗹er, certain businesses may heavily favor cash, such as smaller restaurants or retailers. Large retailers that sell consumables may have lower levels of receivables because many customers pay in cash, debit cards, or credit cards.

Accounts receivable turnover becomes particularly important in industries where credit is extended for a long period of time. This is because collecting outstanding credit can become🌼 difficult or take longer than expected, which is a concern fo🌠r investors. A business that cannot collect on debts owed will face hardships.

One industry in which noting accounts receivable turnover is important is 澳洲幸运5官方开奖结果体彩网:financial services. For instance, CIT Commercial Services (a First Citizens Bank subsidiary) extends credit to businesses and operates a unit that specializes in factoring. Factoring is a financial transaction where one business sells its accounts receivable to another, often at a discount, allowing those businesses to collect on their receivables. Selling accounts receivables, which are, after all, a 澳洲幸运5官方开奖结果体彩网:current asset, can be considered a way to receive short-term financing. In some cases, it can 𒈔help keep a s🤡truggling company in business—investors should note that this is also a ratio improvement tactic.

Inventory Turnover

A firm that doesn’t hold physical inventory benefits little from an analysis. An example of a company with little to no inventory is the travel firm Priceline. Priceline sells flights, hotels, and related travel services without holding any physical inventory itself. Instead, it collects commissions to facilitate travel service sales.

I🌊nventory turnover measures how quickly a firm sells and replaces its inventory over a specific period. Retailers typically have a high volume of inventory turnover.

Supply chain management consists of analyzi💟ng and improving the flow of inventory throughout a firm’s working capital system. This supply chain can be analyzed by look𒁏ing at inventory in different forms, including raw materials, work in progress, and inventory ready for sale.

Understanding inventory and how quickly it is turned into sales is especially important in the manufacturing🗹 industry. Auto components, automobile, building product manuf🍨acturers, and machinery and metals companies should all turn inventory over at a high rate.

The Bottom Line

Accounts receivable turnover and inventory turnover are widely used measures for analyzing how efficiently a business manages its current assets. Investors interested in companies that hold inventory, like 澳洲幸运5官方开奖结果体彩网:those in the 🅠consumer packaဣged goods sectors, shou𒊎ld place significance🥂 on these turnover ratios.