What is the Receivable turnover ratio?
Receivable turnover ratio or debtor turnover ratio is an activity ratio that indicates the efficiency of the company in managing its receivable balance.
Receivable turnover ratio meaning
When the company makes a sale of a product or service, it often provides a certain credit period for the buyer to make the payment. Such sales are called as credit sales.
Buyers who purchase goods or services from the company on credit are called Receivables or Debtors.
The money owed to the company by such buyers is shown on the Balance Sheet as “Receivables” or “Debtors”.
Receivable turnover ratio explains how many times its debtor balance outstanding were turned over during a given period, generally a year.
It indicates the efficiency of the collection department of the company.
Receivable turnover ratio formula
The debtor turnover ratio formula is quite logical.
We take Credit sales in the numerator and Average Receivables in the denominator.
Credit sales are the sales made by the company to customers without receiving cash.
Such customers are given a credit period (time period) to make the payment.
Average receivables are nothing but a simple average of closing balance of receivables as at the current period and previous period.
Let us understand the debtor turnover ratio formula with a hypothetical example.
Receivable turnover ratio example
Let us look at our 1st example.
We take Company A and Company B for calculating DTR.
Values given in the examples below are in $ millions.
Consider the below-given income statement for both the companies.
To calculate the debtor turnover ratio, we need
- Credit sales
- Average Receivable
It is important to note that only credit sales need to be considered and not total sales.
Because in the case of cash sales, the company will always receive payment for the goods or services it renders. Hence, the question of receivable balance does not arise.
Credit sales value for both the companies can be obtained from the income statement.
- Company A = $1,600
- Company B = $700
Now, let us also take a look at total assets for both the companies.
Average Receivables balance for both the companies can be obtained from the current assets section of the Balance Sheet.
It is important to note that Net Receivables has to be considered here and not Gross Receivable.
Net receivable balance is arrived after any reduction towards provision for doubtful debt.
Also, we should not take a mere closing balance of receivables.
Instead, an average of the past 2 year-end balance has to be taken.
But, in our example, we are given only one period data.
Hence, the given receivable balance can be taken as the Average Receivable balance.
- Gross Receivable = 100
- Provision = 20
- Net Receivable = 80
- Gross Receivable = 150
- Provision = 30
- Net Receivable = 120
Now that we know all the values, let us calculate the ratio for both the companies.
Receivable turnover ratio = Credit Sales / Average receivables
- Company A = $1,600/$80 = 20x
- Company B = $700/$120 = 5.8x
What it means that Company A was more efficient in managing its receivable balance.
It could turn the receivable balance almost 20 times during a year.
On the contrary, Company B was inefficient because it had a high receivable balance and hence it could turn only 6 times during the period.
This shows the difficulty in collecting money from its customers.
Receivable turnover ratio using Excel
In our next example, let us calculate the receivable turnover ratio Walmart Inc using excel.
Download the debtor turnover ratio template for Walmart using below option.
Below shown is the Consolidated Income Statement of Walmart
In the case of public companies, it is generally difficult to segregate credit sales and cash sales from the reported income statement.
Hence, for the sake of convenience, analysts generally use the total sales reported as a proxy for credit sales.
Also, we have an extract of Total Assets from Balance Sheet of Walmart.
Receivables as at 31st Jan 2019= $6,283
Receivables as at 31st Jan 2018= $5,614
Average Receivables as at 31st Jan 2019= $5,949
Now that we know all the values, let us calculate the Receivable turnover ratio for Walmart.
As clearly evident, Walmart has a very high receivable turnover ratio of almost 87 x.
What this means is that Walmart was able to turn the receivable balance almost 87 times during the period.
Such a very high debtor turnover ratio is possible only under below situations where either,
- Payments from debtors are being collected in a very short period or
- Most of the total sales are on a cash basis and not on a credit basis.
Even in the case of Walmart, most of the revenue is generated is from cash sales made in the stores.
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Receivable turnover ratio interpretation
- As we have already understood, DTR indicates how efficient is the company in managing its receivable balances.
- Generally, high receivable turnover ratio indicates the company is having either low credit sales or low receivable balances.
- A low receivables turnover ratio is seen as difficulty in collecting money from its customers.
- This will further indicate that the customer may not repay the money.
- Exceptionally high turnover ratio is seen only in cases where most of the sales made by the company are in the form of cash sales.
- Hence, in such companies even Receivable balance will be lower.
Any financial ratios will not give a clear picture when analyzed on a standalone basis.
Hence trend analysis has to be performed for a particular ratio.
This helps in understanding about the sustainability of the performance in the future.
Let us look at how DTR has moved historically in the case of Walmart.
As evident, DTR in the case of Walmart has increased significantly from 71 x to 87 x.
This was possible since the company kept its receivable balance steady and also the company’s collection department was efficient in collecting the money timely.
Walmart was able to increase in revenue while maintaining its receivable balance in check.
This helped the company in increasing its receivable turnover ratio.
Comparison with similar companies
It is also important to compare DTR of the company with other similar companies in the same industry.
This helps in understanding how is the company performing when compared to other competitors or industry as a whole.
Walmart vs Home Depot
Receivable turnover ratio for companies in the retail sector will be typically high because most of the sales are made in the form of a cash basis.
Similar to Walmart, even in the case of Home Depot – a home improvement retailer ( supplies tools, construction products, and various similar services) you can see such a high debtor turnover ratio.
Amazon Inc is into e-commerce, cloud computing, digital streaming, and artificial intelligence and other similar business.
The receivable turnover ratio for Amazon is 15.6 times. It is in the same range of 15-2o x for the past 5 years.
ExxonMobil is a US-based multinational oil and gas company.
Generally, oil and gas companies are into highly capital intensive business.
The turnover ratio in the case of Exxon Mobil is the range of 10-15 x. The company’s revenues have fallen gradually while the receivable balance is in the same range.
Hence, the company is not able to increase its DTR.
Facebook vs Google vs Microsoft
When you calculate the Receivable turnover ratio for tech-based companies like Apple, Facebook, Google ( Alphabet) and Microsoft, you will observe that the ratio is in low single digit.
In the case of Apple, the receivable turnover ratio is as low as 6 times.
Also, we can see that the company’s DTR is falling for the past 5 years which is generally not a good indication.
DTR for Facebook is increasing for the past 5 years.
This is because the company’s revenue is in increasing trend while the receivable balance is steady.
The receivable turnover ratio for Facebook is 8.3 times.
Similar to Apple, even Microsoft company’s DTR is falling for the past 5 years.
Although the company’s revenue is increasing, it is not able to manage its receivable balance efficiently.
Hence the ratio is gradually decreasing.
The debtor turnover ratio for Microsoft for the year ending 30, June 2019 is 4.5 times.
Similar to Facebook, Google is doing a great job in managing its receivable balance.
An increase in revenues coupled with a steady receivable balance increased the debtor turnover ratio.
Currently, the receivable turnover ratio for Google is 7 times.
Receivable days analysis
Below are a few important aspects one must consider while analyzing any company using the receivable turnover ratio
As already highlighted, when available, credit sales should be taken for calculation instead of total sales.
This is because if the sales are made on a cash basis, then debtor balance would not arise and hence, the debtor turnover ratio will be irrelevant.
Provision for doubtful debts
Always net receivable balance has to be taken into consideration.
Any provision for doubtful debts has to be reduced from gross receivable balance.
Also, it is important to take the Average Receivable balance and not mere closing receivable balance while calculating the denominator.
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