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