Liabilities turnover ratio (in days)

Method of calculation

Formula for liabilities turnover ratio in days: short-term liabilities / net revenues from sales * number of days in the period

Ratio's description

The short-term (current) liabilities turnover ratio (in days) indicates the number of days from the moment some liability arises to the moment it is payed.

Ratio's interpretation

  • When assessing the changes in ratio's value over time (over few periods):
    • the increase of liabilities cycle value (assuming that the liabilities are payed on time) is assessed positively, since it indicates better capital management in the company – the company is able to use cheap sources of financing for longer periods of time,

       

    • the increase of liabilities cycle value combined with the inability of making payments on time is assessed very negatively (it is a threat to financial liquidity),

       

    • the decrease of liabilities cycle value is assessed negatively, since it indicates that using other sources of financing is required, but it also indicates an improvement of financial liquidity.