Cash Conversion Ratio (CCR) (2024)

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Step-by-Step Guide to Understanding Cash Conversion Ratio (CCR)

Last Updated March 1, 2024

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What is Cash Conversion Ratio?

The Cash Conversion Ratio (CCR) measures the efficiency at which a company is able to convert its net income into operating cash flow.

Cash Conversion Ratio (CCR) (1)

Table of Contents

  • How to Calculate Cash Conversion Ratio (CCR)
  • Cash Conversion Ratio Formula
  • What is a Good Cash Conversion Ratio?
  • Cash Conversion Ratio Calculator
  • Cash Conversion Ratio Calculation Example

How to Calculate Cash Conversion Ratio (CCR)

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.

  • Net Income → The net income is the profits remaining after subtracting all operating costs (COGS, SG&A, R&D) and non-operating costs (e.g. interest expense, inventory write-down, income taxes).
  • Cash Flow from Operations (CFO) → On the other hand, the operating cash flow (OCF) is the net cash produced by the operating activities of a company.

The reason for comparing the two metrics – the net income and cash flow from operations (CFO) – is attributable to the shortcomings of accrual accounting (U.S. GAAP).

In fact, the cash flow statement (CFS), one of the core financial statements, tracks the real movement of cash and reconciles the net income recorded on the income statement based on the cash inflows (“sources”) and outflows (“uses”) in a predefined period.

Therefore, the cash conversion rate illustrates the variance between the accrual-based net income and reconciled operating cash flow (OCF) metrics.

The cash conversion ratio answers the question of, “For each dollar of net income generated by the company, how much of the earnings remain post-reconciliation in operating cash flow?”

The accounting profit, or net income, has become a standardized measure of the overall profitability for publicly-traded companies.

However, the fact that the profit metric has become “standardized” in terms of the established reporting guidelines (and continuous updates to the accounting rules) should not divert attention from the imperfections of the accrual accounting system.

The steps to calculate the cash conversion ratio are as follows:

  1. Calculate Net Income
  2. Reconcile Net Income to Determine Cash Flow from Operations (CFO)
  3. Divide Net Income by Cash Flow from Operations (CFO)

Cash Conversion Ratio Formula

The cash conversion rate formula adjusts the net income prepared in accordance with U.S. GAAP reporting standards by non-cash expenses (D&A) and non-recurring items.

Cash Conversion Ratio (CCR) = Net Income ÷ Cash Flow from Operations (CFO)


  • Net Income = Pre-Tax Income (EBT) – Income Taxes
  • Cash Flow from Operations (CFO) = Net Income + Depreciation and Amortization (D&A) – Increase in Net Working Capital (NWC) (+/–) Non-Recurring Items

Certain practitioners calculate the cash conversion ratio by dividing free cash flow (FCF) by cash from operations (CFO).

Free Cash Flow Conversion Ratio (FCF) = Free Cash Flow (FCF) ÷ EBITDA


  • Free Cash Flow (FCF) = Cash Flow from Operations (CFO) – Capex
  • EBITDA = Operating Income (EBIT) + Depreciation and Amortization (D&A)

The calculation of free cash flow (FCF) and EBITDA can be far more complicated in practice, with discretionary adjustments that tend to be industry-specific.

But irrespective of whichever method is used, the insights derived and takeaways from performing the analysis should be nearly identical, especially if other metrics are related to working capital and capital expenditures (Capex).

For instance, some of the more common metrics include the cash conversion cycle (CCC), capital intensity ratio, and depreciation-to-capex ratio.

  • Cash Conversion Cycle (CCC) = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)
  • Capital Intensity Ratio = Total Average Assets ÷ Revenue
  • Depreciation-to-Capex Ratio = Annual Depreciation Expense ÷ Capital Expenditure (Capex)

What is a Good Cash Conversion Ratio?

The cash conversion ratio (CCR) provides insights into the operational efficiency of a company, or more specifically, the current state of its working capital management.

Like many working capital metrics, there is no single “good” cash conversion ratio that all industries collectively target. The recent trend in the ratio relative to historical periods and comparisons to the industry benchmark (i.e. peer group) should provide useful information on the company’s operating efficiency.

However, the cash conversion ratio is also a liquidity ratio since a company generating less operating cash flow (OCF) compared to the net income recognized on the income statement could be a potential risk factor.

Generally speaking, the cash conversion ratio should exceed a minimum of 1.0x from a liquidity risk management standpoint.

In particular, if the underlying drivers causing net income to exceed cash flow from operations (CFO) are tied to inefficient working capital management, the current business model likely needs improvements to avoid the risk of becoming insolvent.

The net income of a company — assuming there are no issues with its capital expenditures (Capex) and strategies — cannot consistently be higher than its operating cash flow (OCF).

Why? The working capital management and near-term reinvestment activity is likely inefficient, which is not sustainable over the long term.

Cash Conversion Ratio Calculator

We’ll now move to a modeling exercise, which you can access by filling out the form below.

Cash Conversion Ratio Calculation Example

Suppose we’re tasked with calculating the cash conversion ratio for a company that reported the following income statement data for fiscal year 2023.

Income Statement2023A
Net Revenue$100 million
Less: COGS($50 million)
Gross Profit$50 million
Less: SG&A($20 million)
Operating Income (EBIT)$30 million
Less: Interest Expense, net($5 million)
Pre-Tax Income (EBT)$25 million
Less: Taxes (20% Tax Rate)($5 million)
Net Income$20 million

The accrual-based net income is $20 million for fiscal year 2023, and we’ll adjust that figure by two items.

  • D&A Expense = $6 million
  • Increase in NWC = ($2 million)

The D&A expense is treated as an add-back because no real movement of cash occurred (i.e. non-cash expense).

The increase in net working capital (NWC) means more cash is tied up in operations, reducing the company’s free cash flow (FCF).

The cash flow from operation (CFO) section amounts to $24 million.

  • Cash Flow from Operations (CFO) = $20 million + $6 million – $2 million = $24 million
Select Cash Flow Statement Data2023A
Net Income$20 million
Plus: D&A$6 million
Less: Increase in NWC($2 million)
Cash Flow from Operations (CFO)$24 million

Since the cash flow from operations (CFO) and net income of our company is known, the final step is to divide the two metrics, which results in a cash conversion ratio of 1.2x.

  • Cash Conversion Ratio = $24 million ÷ $20 million = 1.2x

The 1.2x cash conversion ratio implies that for each dollar of net income generated, there is $0.20 in excess remaining after reconciling for non-cash and non-recurring items.

Cash Conversion Ratio (CCR) (5)

Cash Conversion Ratio (CCR) (6)

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Cash Conversion Ratio (CCR) (2024)


Cash Conversion Ratio (CCR)? ›

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 flows to its net profit.

What is a good CCR ratio? ›

In general, however, a CCR of 1 indicates that a business efficiently converts every dollar of net income to cash. A CCR above 1 means that you have high liquidity that you can then use to invest in business growth strategies like marketing, product development, or hiring.

What is the CCR 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.

What is CCR customer conversion rate? ›

Customer conversion rate, a key measure of marketing performance, is the rate at which potential customers take a specific desired action.

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.

What is an acceptable cash 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.

What does 100% cash conversion mean? ›

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 a good cash conversion? ›

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.

What is CCR in cashflow? ›

The cash conversion rate (CCR) is an economic statistic in controlling that represents the relationship between cash flow and net profit. The cash conversion rate is always determined with reference to a specific time period, for example, for a quarter or year.

What is the ideal CR ratio? ›

A CR of 1.33 or more is what differentiates a lendable proposition from one which is not. That is, if a borrowing entity's CR is more than 1.33, it is considered an acceptable credit risk, otherwise not.

How to calculate CCR? ›

It is calculated as operating current assets (such as receivables and inventory) less operating current liabilities (such as payables).

What is the CCR customer rate? ›

Definition. The percentage of customers that have been lost over a specified period of time, or customers that have stopped making purchases. To calculate the churn rate, divide the number of customers lost over a quarter by the number of customers you had at the beginning of the quarter.

What is a good customer conversion rate? ›

Conventional wisdom says that a good conversion rate is somewhere around 2% to 5%. If you're sitting at 2%, an improvement to 4% seems like a massive jump. You doubled your conversion rate! Well, congratulations, but you're still stuck in the average performance bucket.

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.

What is a good cash-to-cash cycle? ›

Generally, the cash-to-cash cycle time benchmark is 30 to 45 days — and the fewer days, the better it is for small companies that do not have the cash flow to allow for longer payment periods.

What is the ideal current cash debt coverage ratio? ›

Generally, a ratio of 1 or higher is considered good, as it indicates that the company can cover its debts with its cash flow. However, it's important to compare a company's ratio to that of its peers to determine its relative financial health.

What is the ideal cash flow coverage ratio? ›

In most industries, the example above would be a prime example of a good cash flow coverage ratio. Generally, businesses aim for a minimum of 1.5 to comfortably pay debt with operating cash flows.

What is a healthy ratio for current ratio? ›

As a general rule of thumb, a current ratio in the range of 1.5 to 3.0 is considered healthy. However, a current ratio <1.0 could be a sign of underlying liquidity problems, which increases the risk to the company (and lenders if applicable).

What is an acceptable cash flow ratio? ›

The operating cash flow ratio represents a company's ability to pay its debts with its existing cash flows. It is determined by dividing operating cash flow by current liabilities. A ratio greater than 1.0 indicates that a company is in a strong position to pay its debts without incurring additional liabilities.


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