Financial Analysis: Cash Conversion Cycle Example

The cash conversion cycle is basically how long it takes a company to go from cash to even more cash, hopefully. It uses information already calculated with inventory turnover ratio: the days’ sales in receivables and the days’ payables outstanding. If you have questions about any of those ratios, I’d encourage you to go watch the short video on those topics. The cash conversion cycle is a measure of efficiency, but also a measure of liquidity. The formula is days’ inventory outstanding (which is sometimes called days’ sale in inventory) and is a variant of inventory turnover ratio), plus days’ sales outstanding (which is sometimes called days’ sales in receivable), minus days’ payables outstanding. So using data already calculated in prior ratios, this sample company has a cash conversion cycle of 25 days, which impacts liquidity because it takes 25 days to go from cash to more cash, but also impact efficiency, because most of the cash is tied up in inventory.

Please note that it is possible to have a negative cash conversion cycle, which is really a positive for cash flows.

test attribution text

Add Comment