In evaluating credit policy effectiveness, which ratio is particularly useful?

The accounts receivable turnover ratio is particularly useful in evaluating the effectiveness of a credit policy because it measures how efficiently a company is collecting its receivables. This ratio indicates how many times, on average, accounts receivable are collected during a specific period, typically a year. A higher turnover ratio signifies that a business is effective in collecting its debts and managing credit, suggesting that its credit policies are working as intended.

Evaluating credit policy effectiveness is crucial because it can directly impact cash flow and overall financial health. If a company has slow collections or high amounts of outstanding receivables, it may indicate that its credit policies are either too lenient or not enforced effectively.

While the operating margin ratio, debt to equity ratio, and gross profit margin ratio provide valuable insights into a business's overall financial performance and risk profile, they do not specifically address the efficiency of credit management and receivables collection. Therefore, the accounts receivable turnover ratio stands out as the most relevant measure for assessing credit policy effectiveness.