Cash Conversion

Cash conversion shows how much of the reported profit actually turns into real cash in the company. It compares the inflow of liquid funds with the operating result. High cash conversion is a sign that profits are reliably converted into available cash.

It is usually calculated as operating cash flow divided by EBITDA or, more strictly, as free cash flow divided by EBITDA, the second version including capital expenditure and therefore sitting closer to debt capacity. What counts as a strong figure depends on the definition and business model, while persistently low values point to tied-up working capital, high maintenance investment or to income unmatched by cash. The causes are informative: in a fast-growing company, building inventory and receivables absorbs cash, so a low ratio can be a consequence of growth rather than weakness. If it stays low with stable revenue, it points to customer payment behaviour, inventory problems or capitalised costs.

In subscription businesses the figure can exceed 100 percent, because customers pay in advance and the company operates on other people's money. Cash conversion should be distinguished from the cash conversion cycle, which measures the duration of capital tied up in operating working capital in days. In practice the metric matters above all because interest and principal are serviced from cash, not from accounting profit.

Decomposing the gap between earnings and cash into its parts is useful for analysis, meaning movements in inventory, receivables and payables together with non-cash items. Only then does it become clear whether a low ratio stems from growth, from weak management or from accounting effects. Comparison across several years is equally informative, since a single period can be distorted by cut-off effects. For financing purposes what counts in the end is the figure after capital expenditure and tax.