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It is a short-term liquidity measure that is used to enumerate the rate at which a company pays its suppliers. With accounts payable turnover, one can get to know how many times a company is paying its accounts payable within a specific period.
AP Turnover = TSP/ (BAP + EAP) / 2
The accounts payable turnover ratios let investors know the frequency of the company paying its AP in a period. In simple words, the ratio helps to evaluate the speed at which a company is paying to its suppliers.
This turns out to be an essential metric for investors to evaluate whether the company has enough revenue or cash to meet short-term responsibilities.
The average accounts payable can be calculated for a period by subtracting the accounts payable balance at the beginning from the accounts payable balance at the end. Now, divide this result by two to get the average accounts payable. Then, take total supplier purchases for that specific period and divide the same by the average accounts payable.
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Suppose there is a company that has purchased its inventory and materials from a supplier for the past one year and got the following results:
Now, the average accounts payable for the whole year will be calculated as:
Now, the accounts payable turnover ratio will be calculated as:
Now, let’s suppose that during the same year, a competitor of this company had acquired the following results:
Now, the average accounts payable will be:
The accounts payable turnover ratio can be calculated as:
Rs. 10,00,0000 / Rs/ 1,75,0000 which will be equal to 6.29 for a year.