Payables Turnover
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What is Payables Turnover?
Payables Turnover measures how quickly a company pays off its accounts payable, calculated as total purchases divided by average accounts payable.
How do you interpret Payables Turnover?
Payables Turnover shows how quickly a company pays off its accounts payable, indicating the speed at which the company meets its obligations to suppliers.
How to Calculate Payables Turnover?
Payables Turnover is calculated by dividing the cost of goods sold (COGS) by the average trade payables.
Payables Turnover = Cost of Goods Sold (COGS) / Average Trade Payables
where
- COGS: The total cost of goods sold during the period.
- Average Trade Payables: The average amount of trade payables during the period, usually calculated as (Beginning Payables + Ending Payables) / 2.
Why is Payables Turnover important?
It is important because it shows how efficiently a company manages its accounts payable. A well-managed payables process can improve cash flow and reduce reliance on short-term financing.
How does Payables Turnover benefit investors?
Payables Turnover helps investors understand how efficiently a company manages its supplier payments. A high turnover ratio may signal good financial health, while a very low turnover ratio might indicate that the company is delaying payments due to cash flow problems.
Using Payables Turnover to Evaluate Stock Performance
While Payables Turnover doesn’t directly influence stock performance, it is a key indicator of the company’s liquidity and financial health. Investors may be concerned if the ratio is too low, indicating that the company could be struggling to meet its obligations.
FAQ about Payables Turnover
What is a Good Payables Turnover?
A good ratio depends on the industry. Generally, a higher Payables Turnover ratio (e.g., above 6) is considered efficient, indicating that the company pays off its suppliers quickly. However, a very high ratio might suggest that the company is not fully utilizing available credit terms.
What Is the Difference Between Metric 1 and Metric 2?
Payables Turnover measures how quickly a company pays off its suppliers, while Receivables Turnover measures how efficiently a company collects payments from customers.
Is it bad to have a negative Payables Turnover?
A low Payables Turnover ratio can indicate that the company is taking longer to pay its suppliers, which could be a sign of cash flow issues. However, it could also mean the company is strategically maximizing its credit terms.
What Causes Payables Turnover to Increase?
The ratio decreases if the company takes longer to pay its suppliers or if the company’s payables increase faster than its cost of goods sold.
What are the Limitations of Payables Turnover?
Payables Turnover doesn’t consider the specific terms of the supplier agreements, which can vary significantly by industry. It also doesn’t account for potential penalties or benefits from early or late payments.
When should I not use Payables Turnover?
Payables Turnover may not be relevant in industries where supplier credit terms are extremely long or irrelevant, such as in cash-only transactions.
How does Payables Turnover compare across industries?
Different industries have different benchmarks. Capital-intensive industries, where large amounts of goods are purchased, may have lower Payables Turnover ratios, while service-based industries often have higher ratios due to lower costs and faster payment cycles.
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