Accounts Payable Turnover Ratio

The Accounts Payable Turnover Ratio is a short term liquidity ratio that helps you to understand how long it takes a given company to pay off its suppliers.

This ratio gives you an indication of how well a company is cash flowing and able to pay those debts down. The formula looks like this.

Cost of Goods Sold/Average Accounts Payable

For example a company buys $20 million dollars of supplies from its supplier. The average accounts payable for any given time is $5 million. This gives us an accounts payable ratio of $20/$5 or $4.

That means the company pays off this debt in 4 payments a year. If the number is high or going up that means that it is paying off its debt faster. If the number is low or going down it signals that the company is taking longer to pay its suppliers.

While this can be a little misleading after all there may be more going on between the company and its supplier that we do not know about, it can be a good indicator. But it should not be used as a sole entry signal for a long term investment. Combining it with other ratios like the PE ratio can have its advantages.

Other Similar Ratios

PE Ratio - This ratio looks at the price of the stock vs the earning of the company. It is considered to be one of the most popular and widely looked at ratios.

Debt to Captial Ratio – This ratio looks at the amount of debt that a company has and compares it to the amount of capital that same company has.

Debt to Equity Ratio – This ratio compares the amount of debt a company has with its total shareholder’s equity.

Interest Coverage Ratio - This ratio is used to see a company’s ability to pay the interest on its expenses.

Dividend Yield Ratio - This ratio tells you how much dividend a company pays off when compared to the price of the stock.

Return From Accounts Payable Turnover Ratio to Fundamental Analysis