Creditors / Accounts Payable Turnover Ratio:

Definition and Explanation:

This ratio is similar to the debtors turnover ratio. It compares creditors with the total credit purchases.

It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. Same as debtors turnover ratio, creditors turnover ratio can be calculated in two forms, creditors turnover ratio and average payment period.

Formula:

Following formula is used to calculate creditors turnover ratio:

[Creditors Turnover Ratio = Credit Purchase / Average Trade Creditors]

Average Payment Period:

Average payment period ratio gives the average credit period enjoyed from the creditors. It can be calculated using the following formula:

[Average Payment Period = Trade Creditors / Average Daily Credit Purchase]

[Average Daily Credit Purchase= Credit Purchase / No. of working days in a year]

Or

[Average Payment Period = (Trade Creditors × No. of Working Days) / Net Credit Purchase]

(In case information about credit purchase is not available total purchases may be assumed to be credit purchase.)

Significance of the Ratio:

The average payment period ratio represents the number of days by the firm to pay its creditors. A high creditors turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of the company. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors.

 

You may also be interested in other relevant articles: Horizontal Analysis or Trend Analysis Trend Percentage Vertical Analysis Limitations of Financial Statement Analysis Accounting Ratios definition, advantages, classifications and limitations Financial Ratio Formulas Profitability ratios: Gross profit ratio Net profit ratio Operating ratio Expense ratio Return on shareholders investment or net worth Return on equity capital Return on capital employed (ROCE) ratio Dividend yield ratio Dividend payout ratio Earnings Per Share Ratio Price earning ratio Liquidity ratios: Current ratio Liquid /Acid test / Quick ratio Activity ratios: Inventory/Stock turnover ratio Debtors/Receivables turnover ratio Average collection period Creditors/Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio Over and under trading Leverage ratios or long term solvency ratios: Debt equity ratio Proprietary or Equity ratio Ratio of fixed assets to shareholders funds Ratio of current assets to shareholders funds Interest coverage or debt service ratio Capital gearing ratio Over and under capitalization

 

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