Which financial metric would you analyze alongside accounts receivable turnover ratio for better financial health?

When assessing the financial health of a business, analyzing the accounts receivable turnover ratio in conjunction with the inventory turnover ratio provides valuable insights into the company's efficiency in managing its assets.

The accounts receivable turnover ratio measures how efficiently a company collects revenue from its credit sales. A higher ratio indicates that the company is promptly collecting payments from customers, whereas a lower ratio may suggest issues with collecting receivables.

The inventory turnover ratio, on the other hand, evaluates how efficiently a company is managing its inventory levels and sales generation. It indicates how quickly inventory is sold and replaced over a period. A high inventory turnover ratio signifies that a company is effectively converting its inventory into sales.

By examining these two ratios together, you can gain a clearer picture of the company's operating cycle. For instance, a company with a high accounts receivable turnover but a low inventory turnover might suggest that while it is collecting payments effectively, it may be struggling with sales or overstocking inventory. Conversely, if both ratios are high, it indicates not only efficient collections but also effective inventory management, which can be a sign of solid financial health.

While other options, such as the asset turnover ratio, debt ratio, and return on equity, provide important financial insights, they do