Accounts Payable Turnover Ratio

Accounts payable activity ratios indicate the speed with which the company pays its suppliers.

The accounts payable turnover ratio represents the number of times payables “turn over,” or are paid and new ones are generated by new purchases, during a year’s time.

Note that the numerator of this ratio represents a full year’s credit purchases. As with accounts receivable and inventory, if the credit purchases figure in the numerator is for a period of less than one year, the credit purchases should be annualized (one quarter’s credit purchases should be multiplied by 4, and so forth).

The average used for average accounts payable should represent the average during the period represented
by the credit purchases being analyzed, even if it is less than a one-year period.

A decrease in the accounts payable turnover ratio over time means the company is paying its payables more slowly, an indication of possible liquidity problems.