Debt Turnover Ratio

Debt Turnover Ratio

Debt Turnover Ratio is very important in the Finance and Investment world. Let us understand what is Debt turnover ratio and how it works?

What is Debt Turnover Ratio?

Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year.

Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. This ratio is also known as Debtors’ Velocity.

Debt Turnover Ratio Formula: -

Debtors Turnover Ratio = Net Credit Sales / Average Account Receivables

Where Average Account Receivables = [Opening Debtors and B/R + Closing Debtors and B/R] / 2

Credit Sales = Total Sales – Cash Sales

Debt Turnover Ratio Calculation: -

You can calculate this ratio by the above basic formula. Once you calculate the ratio, you can analyze the ratio.

Debt Turnover Ratio Interpretation: -

Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.