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(181)-CREDITORS TURNOVER RATIO

Thursday, May 27, 2010

Creditors Turnover Ratio

Creditor’s turnover ratio is ideally calculated by the formula:

Creditors turnover = (Trade creditors / Purchases) X 365

However, it is rate to find purchases disclosed in published accounts and so cost of sales serves as an approximation. The creditors’ turnover ratio often helps to assess a company’s liquidity; an increase in creditor’s days is often a sign of lack of long-term finance or poor management of current assets, resulting in the use of extended credit from suppliers, increased bank overdraft and so on.

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