Cash conversion cycle (in days)

Method of calculation

Ratio's description

From a simplified, model perspective this ratio allows to estimate the number of days from the moment of cash outflow related to liabilities coverage to the moment of cash inflow related to the receivables collection. It informs about the number of days for which additional capital (fixed capital, other than resulting from short-term liabilities) is required to finance the operating cycle of the company.In the interpretation of the cash conversion cycle it is necessary to use the interpretations resulting from the partial cycles, to determine the reasons for cycle elongation or shortening and whether it is a negative effect.a

Ratio's interpretation

• The elongation of cash conversion cycle is assessed negatively, if:
  • it results from the elongation of the inventory and/or receivables cycle, with relatively constant or decreasing liabilities cycle,
• Negative cash conversion cycle is assesed negatively, since it indicate excess (and risky) engagement of current liabilities in the financing of current activities (an exception – trading industry, which often has negative cash conversion cycles, which are not assessed negatively),
• Negative cash conversion cycle is alarming, if it is established that the majority of short-term liabilities comes from short-term liabilities which are past due.