# Receivable Turns

## Investing Lesson 3 - Analyzing a Balance Sheet

The receivable turns or receivable turnover is a great financial ratio to learn when you are analyzing a business or a stock because common sense tells you the faster a company collects its accounts receivables, the better. The sooner customers pay their bills, the sooner a company can put the cash in the bank, pay down debt, or start making new products. There is also a smaller chance of losing money to delinquent accounts.

Fortunately, there is a way to calculate the number of days it takes for a business to collect its receivables. The formula looks like this:

### Receivable Turns Calculation

Credit Sales^{1} ÷ Average Accounts Receivables

^{1: Credit sales are found on the income statement, not the balance sheet}

Let's look at an example. I've built a table at the bottom of this page that will provide you with the numbers you need for a fictional company, H.F. Beverages.

### An Example of Calculating Receivable Turns

H.F. Beverages is a major manufacturer of soft drinks and juice beverages. It sells to supermarkets and convenience stores across the country on a 30 day term. To see if customers are paying on time, we need to look for the income statement. It is normally found within a page or two of the balance sheet in the annual report or 10K. With the income statement in front of you, look for an item called "Credit Sales" (if you can't find it, there is an item called "Total Sales" which is acceptable but not as accurate).

In 2009, H.F. Beverages reported credit sales of $15,608,300. If we look at the excerpt from its balance sheet (above), we will see that in 2009, it had $1,183,363 in receivables and in 2008, $1,178,423. We need to find out the average amount of receivables H.F. had in 2009, so we would take $1,1873,363 + $1,178,423 and divide it by 2.

The answer is $1,180,893.

Plug the two numbers into the receivable turn formula.

Credit Sales of $15,608,300 ÷ Average Receivables = $1,180,893

The answer, called receivable turns by financial analysts and professional investors, is 13.2173. This means that H.F. Beverages collects its accounts receivable 13.2173 times per year. Once you calculate this number, finding out the number of days it takes for customers to pay their bills is simple. Since there are 365 days in a year and the company gets 13.2173 turns per year, take 365 ÷ 13.2173. The answer is the number of days it takes the average customer to pay (in H.F.'s case, we come up with 27.61).

This means the company is doing a good job managing its accounts receivable because customers aren't exceeding the 30 day policy. Had the answer been greater than 30, you would have been wise to try to find out why there were so many late payments, which could be a sign of trouble. (Keep in mind you will need to read through the company's reports to find out what its collection deadline is. Not all companies require their customers to pay within 30 days).

### Sample Receivable Turns Calculation Data

H.F. Beverages Financial Statement Excerpt | ||

2009 | 2008 | |

Accounts Receivable | $1,183,363 | $1,178,423 |

Credit Sales | $15,608,300 |