Accounts Payable Turnover Ratio

An accounting equation that tells you how fast a company pays its bills. The ratio is: total purchases from suppliers divided by average accounts payable.

The number alone tells you little. Look at it compared to prior periods. Is it falling? The company is taking longer to pay its bills. Rising? They’re paying faster. Let’s say Tesla places an order from Goodyear for one million tires that cost $200 a piece. The order is payable in 90 days. Tesla now shows accounts payable of $200 million. That, along with all the other supplies Elon Musk needs to build his space cars, adds up to Tesla’s accounts payable...call it $5 billion.

To tell whether Tesla is doing better or worse with paying suppliers, we’d divide all those supply purchases over a period of time by Tesla’s average accounts payable balance. If Tesla has bought $5 billion in supplies over the last 90 days and has an average accounts payable balance over that period of $1 billion, its AP turnover ratio is 5.

Let’s say it was 10 in the previous 90 days. So Musk cut his turnover in half, but that’s bad. Very bad. Instead of keeping his suppliers paid and his accounts payable low, he’s relying more on credit and taking longer to pay. Although his cars are quiet, suppliers won’t be if he keeps this up.