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Payables Turnover Ratio


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Example:

Calculate the payables turnover rate for Donaldson Books, when:

  • Annual value of goods sold (invoice) = $243,200
  • Returned goods invoice = $5,900
  • Accounts credit sales payable values = $23,000 (beginning of period) and $34,900 (end of period).
  • Net = (annual value of goods sold – returned goods) = $243,200 − $5,900 = $237,300
  • Average accounts payable = [(accounts payables at start date) – (accounts payable end date) ÷ 2] = ( $23,000 + $34,900 ) ÷ 2 = $28,950
  • Accounts payable turnover = =$237,300 ÷ $28,950 = 8.2

Payables Turnover Ratio Definition

Payables turnover is an activity indicator. It measures the relative speed that a company pays its creditors for goods or services.

Payables turnover = Net credit sales ÷ average accounts payable

The ratio also measures the short-term liquidity of a business. That is, analysts and creditors use it to measure how quickly a company can pay its short-term debts.The rate measures how many times during a year that a business pays its average accounts payable to its suppliers.

NOTES:

  • Calculate average accounts payable by adding the accounts payable value at the beginning and end of the period. Then, divide by 2.
  • The net credit purchases value that appears in the denominator is not easy to find because it’s not usually available in financial statements. Instead, look for it in the company’s annual report.
  • Sometimes, companies use the cost of goods sold in the denominator instead of the value of credit purchases.

Analysis

A higher ratio value indicates that a business can repay its suppliers quickly. That’s why a higher accounts payable turnover value is a positive indicator. This ratio can be of great importance to suppliers because they prefer to get paid sooner rather than later.

When other factors are roughly equal, suppliers prefer to sell to a company with higher accounts payable turnover ratio. A falling turnover ratio trend is a sign that a company takes longer than before to pay off its suppliers. The opposite is also true. When the turnover ratio increases, the company is paying of suppliers at a faster rate.