This video shows how to calculate the Accounts Payable Turnover Ratio.

The Accounts Payable Turnover Ratio is calculated by dividing the amount of credit purchases from suppliers by the average Accounts Payable (you compute the average Accounts Payable by adding the ending balance of Accounts Payable to the beginning balance of Accounts Payable and dividing the amount by two). In some textbooks you will see Cost of Goods Sold divided by the average Accounts Payable, but this is not correct.

The Accounts Payable Turnover Ratio tells you how many times the company paid its suppliers during the period (it ignores cash purchases from suppliers). A higher Accounts Payable Turnover Ratio means the company is paying its suppliers quickly. This means the company is paying its bills on time (and is perhaps getting a discount, depending on how fast it pays). However, what is considered a “good” ratio varies by industry; thus, you should compare a company’s Accounts Payable Turnover Ratio to the ratios of the firm’s competitors (and also look at the trend in the ratio over time).