Days Payable Outstanding
Days Payable Outstanding Definition
The days payable outstanding (DPO) calculates the total time it takes a business to pay back its creditors. The days payable outstanding formula is a fairly simple financial ratio and is calculated by taking the accounts payable divided by the cost of sales and then multiply that number by the total number of days. Please see the days payables outstanding formula below.
Days Payable Outstanding Formula
In order to apply some sort of structure to this technique, the DPO is calculated on a quarterly and yearly basis.
Days Payable Outstanding Example
Let's take a look at a the Dell corporation for a real-life example of the days payable outstanding formula. In 2007 Dell's accounts payable was 10,430 (number in millions) and the cost of sales was 47,433. So to calculate the days payables outstanding we would take (10,430/47,433) * 365 = 80.25. This means that it takes Dell roughly 80 days to pay back its creditors.
Assessing the Days Payable Outstanding
Beyond simply displaying how long it takes a company to pay back its creditors, the days payable outstanding also shows how long a company can make interest on the money made. In the science of fundamental analysis, the larger the days payable outstanding the better. This is because the larger the number, the more interest the company is able to earn by placing the monies made in the bank. Remember, this is only a positive if the company is able at some point to actually pay their creditors.