The accounts payable turnover ratio is a short-term liquidity indicator that quantifies how quickly a company pays its suppliers. Accounts payable turnover indicates how many times a company’s accounts payable are paid off in each period.
“Accounts payable” (AP) is a general ledger account that shows a company’s commitment to repay a short-term debt to creditors or suppliers. Another typical meaning of it is the business department or division in charge of making payments to suppliers and other creditors on behalf of the company.
Accounts Payable turnover Ratio= Total supply purchases / Average accounts payable
Average accounts payable= (Beginning accounts payable + Ending accounts payable)/2
To put it another way, the ratio evaluates how quickly a corporation pays its suppliers. Accounts payable is reported under current liabilities on the balance sheet. The accounts payable turnover ratio can be used by investors to analyse if a firm has enough cash or income to cover its short-term obligations. Creditors can use the ratio to determine whether to give the company a line of credit.
A lower turnover ratio shows that a corporation is paying its suppliers later than in previous times. The rate at which a firm pays its debts may reveal information about its financial health. A falling ratio could indicate that a corporation is in financial trouble. A growing ratio indicates that the corporation has enough cash on hand to pay down its short-term debt on time. As a result, a rising accounts payable turnover ratio may indicate that the company is effectively managing its debts and cash flow.