What Is the Accounts Payable Turnover Ratio?

The acꦺcounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. It shows how many times a company pays off its accounts payable during a particular period.

Accounts payable is short-term debt that a compܫany owes to its suppliers and creditors. The accounts payable turnover ratio can reveal how effici✃ent a company is at paying what it owes in the course of a year.

Formula and Calculation of the AP Turnoꦅver Ratio

$\begin{aligned} &\text{AP Turnover}=\frac{\text{TSP}}{(\text{BAP + EAP})/2}\\ &\textbf{where:}\\ &\text{AP = Accounts payable}\\ &\text{TSP = Total supply purchases}\\ &\text{BAP = Beginning accounts payable}\\ &\text{EAP = Ending accounts payable}\\ \end{aligned}$​AP Turnover=(BAP + EAP)/2TSP​where:AP = Accounts payableTSP = Total supply purchasesBAP = Begไinning accounts 🤪payableEAP = Ending accounts payable​

Calculate the average 澳洲幸运5官方开奖结果体彩网:accounts payable for the period by addi🔴ng the accounts payable balance at the beginning of the period to the balance 🐼at the end of the period. Divide the result by two.

Then, divide the total supplier purchases for the period by the average acco🐲unts payab🎶le for the period.

What the AP Turnover Ratio Can Tell You

The accounts payable turnover ratio shows investors how many times per period a company 澳洲幸运5官方开奖结果体彩网:pays its accounts payable. In other word🍃s, the ratio measures the speed at which a company pays its sup🌼pliers.

Investors can use the accounts payable turnover ratio to deteꩵrmine if a company has enough cash or revenue to meet its short-term obligations. Creditors can use the ratio to measure whether to extend a line of credit to the company.

A Decreasing AP Turnover Ratio

Measured over time, a decreasing figure for the AP turnover ratio indicates that a company is taking longer to pay off its suppliers than in previous periods. This could signal that a company is in 澳洲幸运5官方开奖结果体彩网:financial distress. Alternatively, a decreasing ratio could also mean the company has negotiated differ☂ent p🐼ayment arrangements with its suppliers.

An Increasing AP Turnover Ratio

When the figure for the AP 澳洲幸运5官方开奖结果体彩网:turnover ratio increases, the company is paying off suppliers at a faster rate than in previous periods. It means the company has plenty of cash available to pay off its short-term ♒debts in a timely manner. This can indicate that the company is managing its debts and cash flow effe🎃ctively.

However, an increasing ratio over a long period of time could also indicate that the company is not reinvesting money back into its business. This could result in a lower growth rate and lower earnings for the company in the long term.

Ideally, a company wants🐻 to generate enough revenue to pay off its accounts payable quickly, but not so quickly that the company lacks the cash needed to take advantage of opportunities to invest in its growth.

Example of How To Use the AP Turnover Ratio

Here's an example of how an investor might consider an AP turnover ratio comparison when investigating companies in which they might invest.

Company A purchased its materials and inventory from one supplier and calculated an AP turnover ratio for the past year with th꧙e following numbers:

• Total supplier purchases were $100 million for the year.
• Accounts payable was $30 million at the start of the year and $50 million at the end of the year.
• The average accounts payable for the entire year was ($30 million + $50 million) / 2, or $40 million.
• The accounts payable turnover ratio was $100 million / $40 million, or 2.5 for the year.
• Company A paid off their accounts payable 2.5 times during the year.

During the same year, Co▨mpany B, a competitor of Company A, calculated its AP turnover rat💧io as shown below:

• Total supplier purchases were $110 million for the year.
• Accounts payable was $15 million at the start of the year and $20 million at the end of the year.
• The average accounts payable for the entire year was ($15 million + $20 million) / 2, or $17.5 million
• The accounts payable turnover ratio was $110 million / $17.5 million, or 6.29 for the year.
• Company B paid off their accounts payable 6.9 times during the year.

The investor can see that Company B paid off its suppliers at a faster rate than Company A. That could mean that Company B is a better candidate for an investment. However, the investor may want to look at a succession of AP turnover ratios for Company B to determine in which direction they've been moving.

ඣ That, in turn, may motivate them to look more closely at whether Company B has been managing its cash flow as effectively as p💞ossible.

In addition, before making an investment decision, the investor should review other financial ratios as well to get a more comprehensive picture of the company's financial health.

AP Turnover Ratio vs. AR Turnover Ratio

The accounts receivable turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its receivable🐼s, or the🎃 money owed to it by its customers. The ratio demonstrates how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or paid.

So, while the accounts receivable turnover ratio shows how quickly a company gets paid by its customers, the accounts payable tu🐓rnover ratio 🤪shows how quickly the company pays its suppliers.

Limitation of the AP Turnover Ratio

As with all financial ratios, it's useful to compare a company's AP turnover ratio with companies in the same ♚industry. That can help investors determine how capable one company is at paying its bills compared to others.

On the other hand, a consistently high or increasing ratio, especially when compared to the industry standard, could alert creditors and investors to a situation in which a company isn't managing its cash properly and failing to reinvest in its growth.

Consequently, a high or low ratio shouldn't be taken at face value. Instead, investors who note the AP turnover ratio may wish to do additional research to determine the reason for it.

The Bottom Line

The accounts payable turnover ratio is a measurement of how efficiently a company pays its short-term debts. Normally, the higher the ratio, the better th♛e company is at paying its bills.

The ideal AP turnover ratio should allow it to pay off its debts quickly and reinvest m🍸oney in itself to grow its business. A higher ratio also means the potential for better rates on purchases and loans.