The ratios provide investors with an idea of the overall operational performance of a firm.
Alternatively, a low or declining turnover can signal that customers are struggling to pay their bills.
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Once again, a high turnover compared to that of peers means that cash is collected more quickly for use in the company, but be sure to analyze the turnover ratio in relation to the firm’s competitors.
A very high receivables turnover ratio can also mean that a company’s credit policy is too stringent, causing the firm to miss out on sales opportunities.
Inventory turnover is calculated by dividing cost of goods sold by average inventory.