Accounts payable (sometimes shortened to "AP") is a value that represents a company's obligation to pay off short-term debts to its vendors, creditors, or suppliers. The sum of all these outstanding amounts is shown as the accounts payable balance under the current liabilities portion on the company's balance sheet.
How can I use information about the accounts payable when I invest in stocks?
- You use the accounts payable to determine the company's current ratio. This will help you to understand the company's liquidity position and its ability to pay off its short-term obligations. If the accounts payable is high, it will inflate the current liabilities and reduce the current ratio. For example, Apple has a current asset of $162,819 million and current liabilities of $105,718 million, while Amazon has current assets of $96,334 million and current liabilities of $87,812 million. This means that Apple's current ratio is 1.54, while Amazon's current ratio is much lower at 1.1. Comparing the accounts payables between the two companies, Amazon has a slightly higher amount of accounts payable of $47,183 million, while Apple only has $46,236 million of accounts payable. This could indicate that accounts payable might be one contributing factor reducing the company's current ratio. In this case, Apple is a much better investment option of the two since it has a higher ability to meet any short-term financial demands.
- However, merely comparing accounts payable between companies in absolute terms is not accurate as a company's liquidity position also depends on the aggregate current assets and other current liabilities. Let's use the same example for Apple but compare it with Tesla's financials. Tesla has a current ratio of 1.13 which is lower than Apple's 1.54. Still, its accounts payable of $3,771 million is much lower than that of Apple, suggesting that it is only accurate to compare accounts payable in relative terms. Furthermore, different industries may have different credit periods. In sectors where it is typical to extend credit terms for 90 days or longer, it is normal to have a higher accounts payable balance while some industries where short-term collections are critical tend to have a lower accounts payable balance. Thus, when comparing accounts payable, we need to look at companies within the same industry.
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