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Payable turnover ratio definition

Description

Payable turnover ratio measures the amount of accounts payable to suppliers (and other short term creditors) that can be covered in the given period of time (per year, per quarter and etc). Data to calculate this ratio is collected from balance sheet and income statement.

This ratio mostly interests company’s short term creditors as it shows company’s ability to cover its liabilities. Calculating payable turnover ratio, total purchases are divided by the average account payable, but also cost of goods sold can be used instead of total purchases.

Norms and limitations

An unduly small value of payable turnover shows that the company might have difficulties covering its’ payments to suppliers (and other short term creditors). Also it might mean that the company has negotiated very favorable conditions from their suppliers. In other way if the value of the ratio is high it indicates faster payments to suppliers.

There are no general norms for this ratio. It is recommended to compare this ratio with those of the companies, working within the same industry.

Formula

Cost of goods sold (COGS, Cost of sales) is the cost that goes directly into creating the products that a company sells.

Accounts payable is a balance sheet entry that shows company’s obligations to pay its’ short term liabilities (liabilities that must be covered within the period of 12 months) to its creditors (most often to suppliers).