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Accounts Payable Turnover Ratio

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Accounts Payable Turnover is an accounting liquidity metric that tries to evaluate how fast a company pays off its creditors/suppliers. The metric shows how many times, in a given period, a company pays its average accounts payable.

The formula:

Accounts Payable Turnover Ratio = Total supplier Purchases / Average Accounts Payable.

If a company makes $50 million in purchases from its various suppliers in one year, and at any point in time holds an average accounts payable of $2,5 million, then the accounts payable turnover ratio is 20 ($50 million/$2,5 million)

A high accounts payable turnover ratio signals that a company pays off its suppliers quickly, and might signal to e.g. investors that the company generates money rather quickly. On the other hand, a low ratio might signal that a company generates money rather slowly, and that it might have troubles with paying off suppliers.

Nevertheless, a high accounts payable turnover ratio is not always in the best interest of a company.

Many companies are in great need of liquidity to pay its obligations like wages etc., and many companies could get liquidity benefits from lowering their accounts payable turnover ratios.

If the accounts payable turnover ratio is considered too high, companies could seek longer credit periods, which might help to improve liquidity. Likewise, if a company gets longer credit periods, the company may invest their money elsewhere within the credit period, which can be very feasible, if suppliers are not charging any interests fees for their credits.

Date Created: 2009-11-20
Posted by: Admin
Accounts Payable Turnover Ratio

Related resources:

Return on Investment (ROI)
Return on Assets (ROA)
Return on Equity (ROE)
Return on Sales (ROS)
Return on Capital Employed (ROCE)
Contribution Margin and Contribution Margin Ratio

Online MBA, Online MBA Courses, Accounts Payable Turnover Ratio, example, formula, calculation


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