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Computerized Investing > Second Quarter 2011

The Cash Conversion Cycle

PRINT | | | | COMMENTS (3) | A A   Reset

by CI Staff

Through the normal course of business, companies acquire inventory on credit, which they in turn use to create products. These products are then sold, oftentimes on credit. These actions generate accounts payable and accounts receivable, with no cash exchanged until the company collects accounts receivable and settles the accounts payable.

The cash conversion cycle (CCC) measures the time—in days—that it takes for a company to convert resource inputs into cash flows. In other words, the cash conversion cycle reflects the length of time it takes a company to sell inventory, collect receivables, and pay its bills. As a rule, the lower the number, the better. This is because, as the cash conversion cycle shortens, cash becomes free for a company to invest in new equipment or infrastructure or other activities to boost investment return. Also, the cash conversion cycle can be useful in comparing close competitors and assessing management efficiency.

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Discussion

Bill from PA posted over 3 years ago:

i just read a book by a journalist who went through harvard's MBA program. one of his lessons past on was that inventory is a millstone for any business. so CCC could be a usefull tell for any stock. i wish another article could be written showing where to get the initial numbers.


Wayne from IL posted over 3 years ago:

AAII's fundamental stock screening and research database program, Stock Investor Pro, was the source of the underlying financial statement data for the article. The only other source that I am aware of that offers several years of financial statement data (without digging through 10-Ks) is SmartMoney.com. Wayne A. Thorp, CFA, editor, Computerized Investing.


Stephen Behringer from MT posted about 1 year ago:

In the retail business, management cannot allow accountants to make merchant decisions. Inventory on hand can be a good thing--to a point, of course. More inventory makes a store 'feel' well stocked and attractive to customers. Customer research proves that shoppers will go elsewhere if the size, color, style they want is not there. So, these metrics are interesting and can be telling BUT not without deep knowledge of the in-store environment (shopability) and shopper behavior.


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