CFA CFA Level 1 Accounts payable turnover ratio significance

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Accounts payable turnover ratio significance

  • This topic has 3 replies, 2 voices, and was last updated Mar-21 by rahul12.
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      Accounts payable turnover ratio measures average number of times the accounts payable are paid during a period.

      What is logic behind this statement?

      Zee Tan voted up
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      Having a silly doubt

      The formula is

      net credit purchases/average creditors

      Suppose this is 100/50 = 2 times.

    • Up
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      nearly, the formula is net credit purchases / avg payables.

      let’s try an example: assume that the credit purchases for a company for the previous year were $100k and the beginning and ending payables for the year were $20k and $40k.

      so payables turnover = 100k/30k = 3.33x

      it shows people how fast the company can pay its creditors in a year, for CREDIT purchases, so it’s an indicator of creditworthiness. because in this example, they bought stock on credit for 100k, but the average payables throughout the year is $30k only (that means they paid $70k on average relatively quickly to reduce supplier credit)), meaning they are able to pay creditors 3.33x a year, which is reassuring for suppliers who provide credit.

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      so accounts payable turnover ratio provides a measure of how effectively a business is managing its payables. this is because it measures the number of times the company pays off all its creditors in one year.

      in a way, it shows how fast or slow the company is pays its creditors. analysts usually use this and compare with a company’s peer in the industry: if it is too low, it means the company is taking too long to pay its creditors. if it is too high, it may indicate the company is not taking full advantage of the credit facility provided by its suppliers, or maybe just paying earlier to get supplier discounts.

      makes sense?

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