Feb 8, 2023

# Cash Conversion Cycle

## What is Cash Conversion Cycle

Cash conversion cycle (CCC) is a financial metric that measures the length of time between a company’s purchases of inventory and the collection of cash from its sales. It is a measure of the time it takes for a company to turn its investments in inventory and other resources into cash from sales. The cash conversion cycle (CCC) essentially looks at the amount of time a company takes to convert its investments in inventory into cash after selling it.

## Why Cash Conversion Cycle is important

The cash conversion cycle is an important metric to consider when analyzing the overall financial health of a company. It helps investors and analysts understand how quickly a company can convert its investments in inventory into cash. It also serves as an indicator of a company’s liquidity and efficiency. A low cash conversion cycle is generally a good sign, as it indicates that a company is able to quickly turn its inventory into cash. A high cash conversion cycle, on the other hand, indicates that a company is not efficiently managing its inventory and is taking too long to collect cash from its sales.

## How Cash Conversion Cycle is calculated

The cash conversion cycle is calculated by adding the days inventory outstanding (DIO) to the days sales outstanding (DSO) and then subtracting the days payable outstanding (DPO).

The formula for the cash conversion cycle is as follows:

CCC = DIO + DSO - DPO

Where:

DIO = Days Inventory Outstanding

DSO = Days Sales Outstanding

DPO = Days Payable Outstanding

The days inventory outstanding (DIO) is the average number of days it takes a company to sell its inventory. It is calculated by dividing the average inventory for a period by the cost of goods sold for the same period and then multiplying by the number of days in the period.

The days sales outstanding (DSO) is a measure of the average number of days it takes a company to collect cash from its sales. It is calculated by dividing the accounts receivable for a period by the total credit sales for the same period and then multiplying by the number of days in the period.

The days payable outstanding (DPO) is the average number of days it takes a company to pay its bills. It is calculated by dividing the accounts payable for a period by the total purchases for the same period and then multiplying by the number of days in the period.

## How to improve Cash Conversion Cycle

A company can improve its cash conversion cycle by reducing its DIO, DSO, and DPO. To reduce DIO, a company can focus on reducing its inventory levels and improving its inventory management systems. To reduce DSO, a company can focus on improving its collections processes and credit policies. To reduce DPO, a company can focus on negotiating longer payment terms with its suppliers.

## Why investor value low Cash Conversion Cycle

Investors value companies with low cash conversion cycles because they are able to convert their investments in inventory into cash more quickly. This means that the company is able to generate more cash from its operations and is more likely to be able to pay dividends to shareholders. Low cash conversion cycles also indicate that a company is efficiently managing its inventory, which is a sign of good financial health.

## How Cash Conversion Cycle relates to other financial metrics

The cash conversion cycle is related to other financial metrics such as return on assets (ROA), return on equity (ROE), and operating cash flow (OCF). A low cash conversion cycle indicates that a company is efficiently managing its inventory and is able to quickly convert its investments in inventory into cash. This is generally a good sign for ROA, ROE, and OCF, as it indicates that the company is able to generate more cash from its operations and is more likely to be able to pay dividends to shareholders.

## Sources

https://www.investopedia.com/terms/c/cashconversioncycle.asp

https://www.investopedia.com/terms/d/dio.asp

https://www.investopedia.com/terms/d/dso.asp

https://www.investopedia.com/terms/d/dpo.asp

https://www.investopedia.com/terms/r/returnonassets.asp

https://www.investopedia.com/terms/r/returnonequity.asp

https://www.investopedia.com/terms/o/operatingcashflow.asp

# Cash Conversion Cycle

## What is Cash Conversion Cycle

Cash conversion cycle (CCC) is a financial metric that measures the length of time between a company’s purchases of inventory and the collection of cash from its sales. It is a measure of the time it takes for a company to turn its investments in inventory and other resources into cash from sales. The cash conversion cycle (CCC) essentially looks at the amount of time a company takes to convert its investments in inventory into cash after selling it.

## Why Cash Conversion Cycle is important

The cash conversion cycle is an important metric to consider when analyzing the overall financial health of a company. It helps investors and analysts understand how quickly a company can convert its investments in inventory into cash. It also serves as an indicator of a company’s liquidity and efficiency. A low cash conversion cycle is generally a good sign, as it indicates that a company is able to quickly turn its inventory into cash. A high cash conversion cycle, on the other hand, indicates that a company is not efficiently managing its inventory and is taking too long to collect cash from its sales.

## How Cash Conversion Cycle is calculated

The cash conversion cycle is calculated by adding the days inventory outstanding (DIO) to the days sales outstanding (DSO) and then subtracting the days payable outstanding (DPO).

The formula for the cash conversion cycle is as follows:

CCC = DIO + DSO - DPO

Where:

DIO = Days Inventory Outstanding

DSO = Days Sales Outstanding

DPO = Days Payable Outstanding

The days inventory outstanding (DIO) is the average number of days it takes a company to sell its inventory. It is calculated by dividing the average inventory for a period by the cost of goods sold for the same period and then multiplying by the number of days in the period.

The days sales outstanding (DSO) is a measure of the average number of days it takes a company to collect cash from its sales. It is calculated by dividing the accounts receivable for a period by the total credit sales for the same period and then multiplying by the number of days in the period.

The days payable outstanding (DPO) is the average number of days it takes a company to pay its bills. It is calculated by dividing the accounts payable for a period by the total purchases for the same period and then multiplying by the number of days in the period.

## How to improve Cash Conversion Cycle

A company can improve its cash conversion cycle by reducing its DIO, DSO, and DPO. To reduce DIO, a company can focus on reducing its inventory levels and improving its inventory management systems. To reduce DSO, a company can focus on improving its collections processes and credit policies. To reduce DPO, a company can focus on negotiating longer payment terms with its suppliers.

## Why investor value low Cash Conversion Cycle

Investors value companies with low cash conversion cycles because they are able to convert their investments in inventory into cash more quickly. This means that the company is able to generate more cash from its operations and is more likely to be able to pay dividends to shareholders. Low cash conversion cycles also indicate that a company is efficiently managing its inventory, which is a sign of good financial health.

## How Cash Conversion Cycle relates to other financial metrics

The cash conversion cycle is related to other financial metrics such as return on assets (ROA), return on equity (ROE), and operating cash flow (OCF). A low cash conversion cycle indicates that a company is efficiently managing its inventory and is able to quickly convert its investments in inventory into cash. This is generally a good sign for ROA, ROE, and OCF, as it indicates that the company is able to generate more cash from its operations and is more likely to be able to pay dividends to shareholders.

## Sources

https://www.investopedia.com/terms/c/cashconversioncycle.asp

https://www.investopedia.com/terms/d/dio.asp

https://www.investopedia.com/terms/d/dso.asp

https://www.investopedia.com/terms/d/dpo.asp

https://www.investopedia.com/terms/r/returnonassets.asp

https://www.investopedia.com/terms/r/returnonequity.asp

https://www.investopedia.com/terms/o/operatingcashflow.asp