Cash Conversion Ratio Template
What is the Cash Conversion Ratio?
Download the free Financial Edge Cash Conversion Ratio template now. The Cash Conversion Ratio (CCR) is a financial metric that measures a company’s efficiency in converting its profits into cash flow. It is particularly important in evaluating a company’s ability to manage its working capital and to generate cash quickly to meet its funding needs.
The CCR is crucial in credit analysis, company valuation, and in leveraged buyouts (LBOs) as it helps assess the quality of a company’s earnings and cash generation capabilities.
Key Points
- The Cash Conversion ratio calculates how much of a company’s net profit is converted into operating cash flow over a specified period
- It is useful to gauge how efficient a company operates in terms of generating cash
- CCR should be larger than 1x (or greater than 100%) to show the company has sufficient liquidity although further details would be more specific to the sector or industry that the company operates in
- If the CCR is negative than the company is incurring losses over the period
Download the Free Template
Download the free Financial Edge Cash Conversion Ratio template now.
Cash Conversion Ratio Formula
The most common formula for calculating the Cash Conversion Ratio is:
This formula compares the cash flow from operations to a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a widely used measure for profitability as it excludes non-cash expenses.
Once calculated the ratio can be used to analyze the company’s performance. If the ratio is greater than 100% (or higher than 1x) this indicates good liquidity and a healthy cash conversion ratio. If it is lower than 100%, we can assume the CCR is weak, although this may be dependent on the sector or market conditions at the time. If the CCR is negative, then the company is loss making. It would be worthwhile to then analyze how long the company has been loss-making and what factors are contributing to this.
As with all ratios, the skill is in using the ratio to form a view of a company’s performance. CCR can be used to measure whether a company’s cash flow is improving over time (or deteriorating). It can also be used relative to peers or companies of a similar size.
Applications of the Cash Conversion Ratio
The CCR is used in various scenarios, such as:
- Credit Analysis & LBOs: analysts use CCR to estimate a company’s debt capacity – a higher CCR suggests a stronger ability to generate cash and meet debt obligations
- Discounted Cash Flow (DCF) Valuation: CCR is also relevant in DCF valuation, where free cash flows are projected to estimate the business’s value – a higher CCR in the steady state implies reduced investment needs and better cash generation
Steps for Using the Template
- Download the template
- Input your company’s data into the blue cells, replacing the example numbers
- Add or remove line items as needed by right-clicking rows and selecting “Insert” or “Delete”
- Ensure the black font formulas reflect any changes you’ve made
- This can be extended across multiple years, or used to compare companies
- You now have your customized Cash Conversion Ratio template ready for analysis
Conclusion
The CCR is a useful financial metric when looking at how efficient a company can generate cash from its profits. When liquidity is high, a company can be considered efficient in terms of cash management. Typically, investors will look at CCR during credit analysis and looking at leveraged buyout options. The higher the ratio the more promising it is to model a company generating enough cash flow to meet its debt obligations.
It is also used in DCF analysis which relies to solid cash flow generation to determine a company valuation.
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