Accounts Payable Turnover Ratio = cost of sales
                                                                trade accounts payable

The accounts payable turnover ratio represents the average number of times per year (or per period) that payables "turn over" or are paid for with cash. A higher (more rapid) turnover is generally more favorable as payables are being paid more quickly.

At the same time, paying debts too quickly can use up needed cash. Many businesses extend payment of payables as much as possible to make the best use of their cash. Businesses that manage their payables in this way or that receive extended payment terms from suppliers will, therefore, have a lower (or less rapid) accounts payable turnover. Likewise, so will businesses that are experiencing cash flow crunches or disputed invoices with their suppliers. Some additional research is often necessary to determine the cause of slow or slowing payables turnover, which can be a definite sign of trouble. How does the measure compare to that of the industry? Is a trend obvious? What are the payment terms from the main vendors?

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.) Perhaps the payables balance at the end of a period is inflated due to a seasonal buildup or a big discount from a supplier. If you have enough information, you may compare purchases (as opposed to cost of sales) to the average accounts payable balance.

The ratio may also be affected by a business that fails to input accounts payable in a timely manner (see Fraud: Understating Accounts Payable) or when past due payables are disputed or need to be written off or corrected.

Payables Days = 365
                               accounts payable turnover ratio

"Payables Days" expresses turnover as the average time in days between purchases and their payment. Although, this ratio has the same limitations as the accounts payable turnover ratio, it may be more intuitive to look at payables turnover in terms of days rather than in number of times per period.