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Accounts payable turnover measures the number of times a company pays its accounts payable during its accounting cycle (typically 1 year). In this light it is much like accounts receivable turnover.
The formula for accounts payable turnover is:
Accounts Payable Turnover = annual credit purchases / Average accounts payable
Paying debts too quickly can use up needed cash or indicate a company whose vendors are unwilling to extend credit. Many companies extend payment of payables as much as possible to make the best use of their cash. Companies that manage their payables in this way or that receive extended payment terms from suppliers will have a low accounts payable turnover number. As indicated earlier, companies that are experiencing cash flow problems will also have a low account payable turnover number.
A limitation of the accounts payable turnover ratio involves the fact that it compares a measure of a period of time (cost of sales from the income statement) to one at a point in time (accounts payable from the balance sheet.) If calculating the accounts payable turnover on an intra-period basis you need to account for the period (generally the ratio equation is used for a year-to-year calculation). A problem in analyzing financial statements is that many times expense categories are combined. An example would be an income statement that reports "selling, general and administrative" expense. Obviously recurring expenses such as rents are included and payroll and payroll taxes are included (both expenses should not be part of the calculation) One thought to remember is that with this type of ratio once you pick your numerator and denominator stay consistent!!
Example:
Home Depot(I am using the cost of sales as the numerator) The period is fiscal year ended 1/28/07
Accounts Payable Turnover = $61,054 / (($7,356+$6,032)/2)
Accounts Payable Turnover = 9
