payables turnover

A ratio that measures how quickly a company pays off the money owed to suppliers. The payables turnover ratio is calculated by dividing purchases (on credit) by average payables. A payables turnover of 5.8x suggests that, on average, the firm used and paid off the credit extended 5.8 times during a period of one year, or once every 63 days. The payables turnover increases as more purchases are made or as a company decreases its accounts payable. A high number compared to the industry average indicates that the firm is paying off creditors quickly, and vice versa. An unusually high ratio may suggest that a firm is not utilizing the credit extended to them, or it could be the result of the company taking advantage of early payment discounts. A low payables turnover ratio could indicate that a company is having trouble paying off its bills or that it is taking advantage of lenient supplier credit policies. Note that a change in the payables turnover ratio in a single period can be caused by timing issues, such as the firm acquiring additional inventory for a large purchase or to gear up for a high sales season. Industry norms can vary dramatically.