PART 11 : RATIO ANALYSIS

Debtors Turnover Ratio (Receivable Turnover Ratio)

This ratio shows how fast a company collects money from customers who buy on credit. It tells us if the company is good at getting its payments on time. Formula: Debtors Turnover Ratio = Net Credit Sales ÷ Average Trade Receivables Net Credit Sales = Total credit sales minus any sales returns Average Trade Receivables = (Opening receivables + Closing receivables) ÷ 2 Example: If a company has ₹50 crore in net credit sales and ₹10 crore as average receivables, the ratio is 5 times. This means the company collects all its due money 5 times in a year. What a High Ratio Means (Good Sign): Customers pay quickly Cash flow stays healthy Less risk of bad debts Company needs less borrowing for daily needs What a Low Ratio Means (Warning Sign): Customers take too long to pay Credit policy may be too loose Collection process may be weak Can cause cash shortage and more bad debts Average Collection Period: This tells the average number of days taken to collect payments. Average Collection Period = 365 ÷ Debtors Turnover Ratio If the ratio is 5, the collection period is 73 days. Things to Keep in Mind: A high ratio is usually good, but it depends on the industry. For example, infrastructure companies often have lower ratios because they give longer credit. FMCG or retail companies usually have higher ratios. Always compare with similar companies and check the trend over several years.