A company can display high profitability on paper, while knowing cash tensions. This paradox is explained by a gap between accounting result And Cash actually available. THE Cash Conversion Ratio Allows to measure this ability to transform economic performance into concrete liquidity and for investors, it is an operational credibility indicator.
What does the ratio conversion measure measure?
Cash Conversion Ratio = Cash Flow Operational / Ebitda
- Operational cash flow : cash flow released by activity, including variations in BFR and operating payments.
- EBITDA : operating profit before interest, taxes, depreciation and provisions.
This ratio measures the company’s ability to transform a euro of gross profit into one euro of cash conceded.
Why is this indicator essential for investors?
A validation of the “cash reality”
A good Ebitda means nothing if the cash generated is negative, the Cash Conversion Ratio checks the real solidity of the activity.
An extended operational efficiency measurement
It reflects control of the billing cycle, management of the BFR (stock, receivables, supplier debts) and the management of incoming and outgoing flows.
A financial predictability indicator
Companies with regular conversion are deemed more stable because they can plan their investments without surprise.
A lever to limit dilution
Good conversion makes it possible to partially self -finance growth, therefore to limit external capital needs.
Performance thresholds
| Conversion ratio | Interpretation |
|---|---|
| > 90 % | Very good financial efficiency |
| 70 – 90 % | Mastered efficiency, solid operational model |
| 40 – 70 % | Partial conversion, required optimization |
| <40 % | Potential tension, BFR management to review |
A ratio <50 % in several quarters may indicate a worrying output Between displayed growth and financial reality.
Difference with free cash flow
- Cash conversion : Ebitda transformation efficiency into operating cash.
- Free cash flow : what remains After Investment (CAPEX), debt repayment, taxation …
A company can have good cash conversion, but a negative free cash flow if its investments are heavy. Hence the interest in following both.
How to improve your cash conversion?
- Optimize the BFR
– Reduce customer payment deadlines
– Limit long stocks or collection cycles
– Lie supplier deadlines when possible - Finely pilot invoicing
– Anticipate invoice shipments
– Set up recurring or subscription receipts - Reduce non -cash operating expenses
– Limit excessive provisions
– Negotiate more predictable variable costs - Better align growth on cash capacity
– Modeling cash consumption peaks
– Avoid acceleration without visibility of return
THE Cash Conversion Ratio is the reality test of a income statement. It measures the capacity of a business to make your performance exist on your bank account. For investors, it is a critical filter, between two companies with equal Ebitda, the one that converts better always has the advantage.
See you tomorrow to talk about the Rule of 40, the Grail des SaaS highly.
