Payables Turnover Ratio
Understanding the Payables Turnover Ratio: Measuring Efficiency in Managing Supplier Payments
The Payables Turnover Ratio is a financial metric that measures how efficiently a company manages its accounts payable by determining how many times it pays off its suppliers within a specific period. This ratio helps assess the company's short-term liquidity and creditworthiness.
Payables Turnover Ratio= Cost of Goods Sold (COGS) / Average Accounts Payable
Suppose Company YZA has the following financial details:
Cost of Goods Sold (COGS): $800,000
Beginning Accounts Payable: $100,000
Ending Accounts Payable: $150,000
To calculate the Payables Turnover Ratio:
Calculate the average accounts payable: (100,000+150,000)/2=125,000
Divide COGS by average accounts payable: 800,000/125,000=6.4
A Payables Turnover Ratio of 6.4 indicates that Company YZA pays off its accounts payable approximately 6.4 times a year. This suggests effective management of supplier payments.
Efficiency Ratio