The ratio widely used in financial statements as a part of management report (also comments on main ratios applying for the year’s performance) and in addition to this, the ratio used in impairment tests to measure the cash outflows.

Simply put the ratio shows at which rate the company is paying off its debt. In a way it can be called as a short-term liquidity ratio obviously, but it also shows management commitment, taking responsibility and attitude towards its suppliers. The smaller the number, the longer is the period. The longer the period is, the more time is used to pay off the debt and hence the company is keeping its suppliers at the short end with the money really. It all depends on the relationships and industry standards and practices; however, the longer you wait to pay for your suppliers, the more it’s probable that they will face financial difficulties. Obviously no costumer appreciates this.

One thing is the current value of the ratio, but you also want to keep an eye out for changes in this number. If for an example it’s falling in next period, then it’s a more or less a clear sign the company is facing some sort of financial difficulties and may face problems paying off its debt. Yes, there may be some other reasons behind this situation, but for this you really should know more to presume it. It is always safest to presume worse than inventing excuses really.