Creditors Turnover Ratio

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Definition: Creditors Turnover Ratio

Creditors’ turnover determines the rate at which a company pays off its creditors. It is same as account payable turnover ratio.

It is the ratio of total credit purchases and average accounts payable for a given period.


Formula:

For a given period,

 

Creditors’ turnover ratio = Net credit purchases / average accounts payable

 

Average account payable is average value opening and closing balances of account payable for particular period.

 

Example:

Let’s say a company has made credit purchase of Rs 1,00,000 in 2012. Average accounts payable for the year is Rs. 20,000.

Creditor’s turnover ratio = 1,00,000/20,000 = 5.

It means on average, company pays its creditors 5 times in a year. Considering, 365 days in a year, company pays its debt on in an average 365/5=73 days.


Significance:

Creditors’ turnover ratio is an indicator of the credit worthiness of the company. A high ratio means quick payment to creditors for purchases made on credit and a low ratio may be a sign of delayed payment.

A high credit turnover ratio is always desirable.

 

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