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.

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