Accounts Receivable Ratio

The accounts receivable ratio is used to measure how effectively a company is extending credit and collecting debt.

The formula for this ratio looks like this.

Accounts receivable ratio = (Net Sales) / (Average Account Recievables)

This number allows you to look at how well a company is able to collect on its sales. A low ratio can indicate a company is having trouble collecting. They either need to re-organize the way they run their business or they are getting bad debts, either way a number too low can be a bad sign.

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A high number can indicate a firm has a strict credit policy. Normally the higher the number the better, if the number is too high however it could be a sign that the company is turning away sales.

Other Financial Ratios