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Accounts Payable Days

Moneyzine Editor
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Moneyzine Editor
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December 12th, 2023
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Accounts Payable Days

Definition

The term accounts payable days refers to a calculation that allows an investor-analyst to understand the average time it takes a company to pay its accounts payable balance. This metric is useful when trying to determine if a company can quickly pay for its purchases.

Calculation

Accounts Payable Days = Accounts Payable / Average Daily Purchases

Where:

  • Average daily purchases is found by taking the total annualized purchases divided by 365. This provides a daily calendar rate (not business day rate). In this case, purchases would be equal to the company's total expenses less payroll expense and depreciation.

Explanation

Liquidity measures allow the investor-analyst to understand the company's long term viability in terms of fiscal health. This is usually assessed by examining balance sheet items such as accounts receivable, use of inventory, accounts payable, and short-term liabilities. One of the ways to understand how quickly a company is paying their bills is by calculating their accounts payable days.

Fast payments (low day values) are typically indicative of sufficient cash flow and / or companies taking advantage of discounts offered by its vendors. While the value can be tracked over time to understand if the company's financial position is changing, the accounts payable days is also a useful benchmark to understand a company's position relative to its competitors.

Example

The manager of a large mutual fund would like to assess the ability of Company ABC to pay its bills. He believes this measure would provide a good understanding of the company's cash flow strength. He asked his analytical team to calculate this value based on Company ABC's most recent SEC filing. The following information was taken from the company's 10-K. Accounts payable at the beginning of the period was $7,575,000, while its ending balance was $7,430,000. Total expenses in the same timeframe were $325,419,000, including payroll expenses of $175,322,000 and depreciation of $64,951,000. Using this information to calculate the accounts payable days:

= (($7,575,000 + $7,430,000) /2) / (($325,419,000 - $175,322,000 - $64,951,000) / 365)= ($15,005,000 / 2) / ($85,146,000 / 365)= $7,502,500 / $233,277, or 32.2 days

Since the value of 32.2 days is very close to 30 days, the mutual fund manager concluded Company ABC was not only paying bills quickly, but taking advantage of vendor discounts too.

Related Terms

Liquidity Index
The term liquidity index refers to a calculation that allows an investor-analyst to understand the ability of a company to convert accounts receivable and inventory into cash. This metric is useful when trying to determine if a company can quickly raise cash to pay its liabilities.
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January 23rd, 2024
Inventory to Working Capital Ratio
The term inventory to working capital ratio refers to a calculation that allows an investor-analyst to understand the ability of a company to raise additional cash from working capital. This metric is used in conjunction with other metrics like inventory turnover.
Moneyzine Editor
Moneyzine Editor
January 22nd, 2024
Accounts Payable Turnover
The term accounts payable days refers to a calculation that allows an investor-analyst to understand the number of times a company pays off its purchases in a given timeframe. As is the case with accounts payable days, this metric is useful when trying to determine how quickly a company is able to pay for the materials and services it purchases.
Moneyzine Editor
Moneyzine Editor
December 12th, 2023

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