Trade Payable Turnover Ratio: Meaning, Formula, Significance and Examples

Last Updated : 20 Jun, 2026

Trade Payables Turnover Ratio is a financial ratio that measures how efficiently a company pays its suppliers for goods and services purchased on credit. It is calculated by dividing the Cost of Goods Sold (COGS) or net credit purchases by the Average Trade Payables during a particular period. A higher ratio indicates efficient management of payables and strong supplier relationships, while a lower ratio may suggest delayed payments or ineffective payable management.

The terms cost of goods sold and average trade payable can be defined as:

Cost of Goods Sold: In practical situations, net credit purchases may not be readily available. Therefore, the trade payables turnover ratio is often calculated using the cost of goods sold, which represents the total cost of goods and services sold during the period.

Average Trade Payables: These calculated by adding the opening and closing trade payables and dividing the sum by two. This provides the average amount owed to suppliers during the accounting period.

Formula of Trade Payable Turnover Ratio

Trade~Payables~Turnover~Ratio=\frac{Cost~of~Goods~Sold}{Average~Trade~Payables}

Where,

Cost of Goods Sold = Opening Stock + Purchases - Closing Stock or,

Cost of Goods Sold = Net Sales – Gross Profit

Average Trade Payables = Average~Trade~Payables=\frac{Opening~Trade~Payables+Closing~Trade~Payables}{2}

The numerator of the formula, cost of goods sold, represents the total cost of all goods sold during the accounting period. The denominator of the formula, average trade payables, represents the average amount owed to suppliers for the goods and services purchased on credit during the period.

The average trade payables are calculated by taking the sum of the opening and closing trade payables and dividing by 2. This is done to get a more accurate representation of the trade payables during the period, as trade payables can fluctuate throughout the accounting period.

Significance

The Trade Payable Turnover Ratio is significant because it helps companies in assessing how efficiently they are managing their trade payables. A higher ratio indicates that the company is paying its suppliers promptly, which means it has good credit management practices and maintains healthy relationships with its suppliers. On the other hand, a lower ratio may indicate that the company is having difficulty paying its bills.

Illustration 1:

ABC Limited is a manufacturing company that produces various products. During the year 2021-22, the company had a cost of goods sold of ₹10,00,000. The opening trade payables were ₹ 50,000, and the closing trade payables were ₹ 75,000.

Solution:

Average~Trade~Payables=\frac{Opening~Trade~Payables+Closing~Trade~Payables}{2}

= \frac{50,000+75,000}{2}

= ₹62,500

Trade~Payables~Turnover~Ratio=\frac{Cost~of~Goods~Sold}{Average~Trade~Payables}

=  \frac{10,00,000}{62,500}

= 16

The Trade Payable Turnover Ratio of ABC Limited is 16, which indicates that the company is paying its suppliers promptly and has good credit management practices.

Illustration 2:

XYZ Limited is a retail company that sells various products. During the year 2021-22, the company had a cost of goods sold of ₹50,00,000. The opening trade payables were ₹1,00,000, and the closing trade payables were ₹2,00,000.

Solution:

Average~Trade~Payables=\frac{Opening~Trade~Payables+Closing~Trade~Payables}{2}

=  \frac{1,00,000+2,00,000}{2}

= ₹1,50,000

Trade~Payables~Turnover~Ratio=\frac{Cost~of~Goods~Sold}{Average~Trade~Payables}

= \frac{50,00,000}{1,50,000}

= 33.34

The Trade Payable Turnover Ratio of XYZ Limited is 33.34, which indicates that the company is paying its suppliers promptly and has good credit management practices.

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