Cash Conversion Ratio (2024)

The ratio of the cash flow of a company to its net profit

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Written byCFI Team

What is the Cash Conversion Ratio (CCR)?

The Cash Conversion Ratio (CCR), also known as cash conversion rate, is a financial management tool used to determine the ratio of a company’s cash flowsto its net profit. In other words, it is a comparison of how much cash flow a company generates compared to its accounting profit.

Understanding Cash Conversion Ratio Calculations

When calculating CCR, cash flow is the center of the equation. It is used to determine all cash generated in a given financial period – often quarterly or annually, depending on the company’s accounting cycles.

Cash Flow is generally broken down into three categories:

Operating activities – Cash generated from the operation of the business
Investing activities – Covers all purchases and sales of long-term investments and assets
Financial activities – Covers all transactions related to raising (or repaying) capital

In this case, we want Cash Flow from Operations, orFree Cash Flow(which is equal to operating cash flow minus capital expenditures).

Once cash flow is determined, the next step is dividing it by the net profit. That is the profit after interest, tax, and amortization. Below is the cash conversion ratio formula.

The resulting ratio from this calculation can be either a positive value or a negative value. It can be summarized as: if the ratio is anything above 1, it means that the company possesses excellent liquidity, while anything below 1 implies a weak CCR. Anything negative suggests the company is incurring losses.

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Takeaways

Below are some of the takeaways from calculating the Cash Conversion Ratio of a given company.

1. CCR is a quick way to determine the disparity between a company’s cash flow and net profit

A high cash conversion ratio indicates that the company has excess cash flow compared to its net profit. For mature companies, it is common to see a high CCR because they tend to earn considerably high profits and have accumulated large amounts of cash.

In contrast, companies in the start-up or growth stage tend to have low or even negative cash flows due to the required amount of capital invested in the business. In early stages, companies often find themselves earning negative profits until they reach a break-even point, thus the CRR of these companies would also be negative or low.

2. It is a tool for management decisions

While a high CRR could be a good sign for liquidity, having too much excess cash might imply that the company is not utilizing its resources in the most effective way. The company should consider re-investing in profitable projects or expanding its operations to further enhance the profitability of the business.

When the ratio is low or negative, it could be an indication that the company needs to adjust its operations and start figuring out which activities are sinking its income or whether it needs to expand its market share or increase sales in favor of revamping cash flows.

3. It is an investing indicator tool

To investors, what matters is whether a given company is generating enough cash flow to provide a solid return per share. Thus, significant investment opportunities will offer a higher ratio, while a weak investment will show a lower ratio.

However, some companies may dubiously try to alter the ratio, especially the cash flow part, to attract investors. That’s why proper scrutiny of the books of accounts should be conducted first before making an investment decision based on CCR.

Terms Related to Cash Conversion Ratio

There are familiar terms that look similar to the cash conversion ratio, but they carry a different meaning. They include:

Cash conversion cycles (CCC)

CCC is used for measuring management effectiveness by determining how fast a company can convert cash inputs into cash flows over a given production and sales period.

Conversion cycle

In portfolio management, it is used to determine the number of the common shares which a company has been receiving at a specific time of conversion of each convertible security. That is the ratio of per value of convertible bond divided by the conversion price of equity.

Other resources

Thank you for reading CFI’s guide to Cash Conversion Ratio. To keep advancing your career, the additional CFI resources below will be useful:

Operating Cash Flow Ratio
Comparable Company Analysis
Cash Conversion Ratio Template
Financial Analysis Ratios Glossary
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FAQs

Cash Conversion Ratio? ›

The cash conversion ratio, often abbreviated as “CCR” for brevity, reflects the proportion of the net profit generated by a company that becomes operating cash flow (OCF). The cash conversion ratio compares the reported net income of a company to its cash flow from operations (CFO) in a specified period.

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What is a good cash conversion ratio? ›

What Is Considered a "Good" Cash Conversion Ratio? Depending on the particular industry your enterprise is in, a good CCR will differ. In general, however, a CCR of 1 indicates that a business efficiently converts every dollar of net income to cash.

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What is a good cash flow conversion rate? ›

A “good” free cash flow conversion rate would typically be consistently around or above 100%, as it indicates efficient working capital management. If the FCF conversion rate of a company is in excess of 100%, that implies operational efficiency.

What is the CCC ratio? ›

The cash conversion ratio is a financial metric used to assess a company's ability to convert its net income into cash flow. It measures the proportion of cash generated from operations relative to net income, indicating operational efficiency in converting profits into cash.

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What is a good cash to cash ratio? ›

Although there is no ideal figure, a ratio of not lower than 0.5 to 1 is usually preferred. The cash ratio figure provides the most conservative insight into a company's liquidity since only cash and cash equivalents are taken into consideration.

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What is a bad cash ratio? ›

A cash ratio equal to or greater than one generally indicates that a company has enough cash and cash equivalents to entirely pay off all short-term debts. A ratio above one is generally favored. A ratio under 0.5 is considered risky because the entity has twice as much short-term debt compared to cash.

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Is 0.2 cash ratio good? ›

A: If a cash ratio is 0.2, it means that a company likely has more current liabilities than it does cash or cash assets to pay them off. This can present a big problem for finance providers, who will be less likely to offer funding to a company that has more current liabilities to manage.

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What is a healthy CCC? ›

CCC of less than 30 days is optimal as it indicates that the company quickly converts its investments in inventory and other resources into cash. CCC between 30 and 60 days is average and may indicate that there is room for improvement.

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What is considered a good CCC? ›

What is a good cash conversion cycle? Research indicates that the median cash conversion cycle is between 30 days and around 45 days. Aiming to reduce your cash cycle to 45 days or less would mean you turn cash into inventory and back again quicker than the average business.

Should CCC be high or low? ›

Essentially, CCC represents how fast a company can convert the invested cash from start (investment) to end (returns). The lower the CCC, the better. Inventory management, sales realization, and payables are the three key ingredients of business.

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What is the rule for cash ratio? ›

The cash ratio is cash and cash equivalents divided by current liabilities. It determines a company's ability to pay its short-term obligations using cash and near-cash assets. A good cash ratio is when the calculation is equal to or greater than 1 and reflects a strong liquidity position of a company.

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What is a healthy cash flow ratio? ›

Key Takeaways

A ratio less than 1 indicates short-term cash flow problems; a ratio greater than 1 indicates good financial health, as it indicates cash flow more than sufficient to meet short-term financial obligations.

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What is a good price to cash ratio? ›

A good price-to-cash-flow ratio is any number below 10. Lower ratios show that a stock is undervalued when compared to its cash flows, meaning there is a better value in the stock.

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What is the ideal ratio of cash position ratio? ›

There is no ideal figure, but a cash ratio is considered good if it is between 0.5 and 1. For example, a company with $200,000 in cash and cash equivalents, and $150,000 in liabilities, will have a 1.33 cash ratio.

Is a 7% conversion rate good? ›

Yes, achieving a 7% conversion rate is considered excellent on Etsy, indicating strong product appeal and effective marketing.

Is 3% a good conversion rate? ›

In fact, a “good” website conversion rate falls between 2% and 5% across all industries. Industry-specific conversion rates vary quite a bit more. Some industries, like industrial equipment, have very low-performing websites.

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Is 12% a good conversion rate? ›

A good conversion rate is higher than 10%, with a small percentage of businesses obtaining 11.45% on average, while this number varies based on industry and channel.