Deteriorating rto may also indicate a company is

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Deteriorating RTO may also indicate a company is loosening its credit policies or engaging in “channel stuffing” to increase sales at the end of its quarter. ______________________________________________________________________________________________________________________________ * In general, companies do not disclose “Net Credit Revenue”, so investors must use “Net Revenue” (instead of “Net Credit Revenue”) in the numerator when calculating this ratio.
16 6-31 Analyzing Receivable Turnover There is no general norm for the receivables turnover ratio, it strongly depends on the industry and other factors. Higher values of RTO indicate that the company is more efficient in terms of collecting their accounts receivables. Similarly, low RTO implies inefficient management of debtors or less liquid debtors. But relatively high RTO can indicate that the company's credit lending policies are too stringent, preventing prime borrowing candidates from becoming customers. 6-32 Days Receivable and Days Inventory Days Receivables. Measures the average number of days that a company takes to collect revenue after a sale is made Days Receivables = 𝟑?? ??𝒚??????????? ????????Note: This ratio is known by other names: Days’ sales in receivablesDays Sales Outstanding Average Receivable Collection Period
17 6-33 Comparing “Turnover” Ratios and “Days” Ratios Days Receivable and Receivable Turnover measure the same thing Days receivable measures the average days it takes to collect a receivable RTO measures the number of times a company turns over its A/R during the year Days inventory varies significantly between different industries. For example, business which sell perishable goods such as fruits and vegetables have very low values of days' sales in inventory whereas companies selling non-perishable goods such as cars have high values of days of inventory. 6-34 Accounts Receivable vs Financing Receivables When calculating receivable turnover or days receivables, you should exclude financing receivables because most of these receivables are not currently due. Financing receivables. These are interest-bearing receivables that are due in monthly installments. The installment period may last anywhere from 6 months to several years. Accounts receivable . These are “open” receivables with a single due date.Some accounts receivable charge interest (especially if the customer does not pay the bill on time), but others do not.
18 6-35 Example of Financing Receivables 20142013Current assetsCash and cash equivalents7,3416,081Receivables - trade and other7,7378,413Receivables - financing9,0278,763Deferred and refundable income taxes1,7391,553Inventories12,20512,625Prepaid expenses and other current assets818900Total current assets38,86738,335Property and equipment, net16,57717,075Long-term receivables - trade and other1,3641,397Long-term receivables - finance14,64414,926Investments in unconsolidated affiliated companies257272Noncurrent deferred and refundable income taxes1,404594Intangible assets3,0763,596Goodwill6,6946,956Other assets1,7981,745Total assets84,68184,896Caterpillar Inc.

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