Cash conversion ratio
How much of the profit you reported actually turned into cash.
01 What it is
Why anyone looks at this number
How much of the profit you reported actually turned into cash.
It is the fastest quality-of-earnings check there is. Two numbers, and it tells you whether the profit is real or is sitting in receivables and stock.
02 The formula
How it is worked out
Cash conversion ratio = operating_cash_flow ÷ net_income grain : period × entity unit : ratio source : Cash flow statement and the P&L, from consolidation
Use the same consolidation scope for both. A ratio built from group cash and entity-level profit is meaningless, and it happens more often than anyone admits.
03 Worked example
The same number, with real inputs
| Operating cash flow | €4.2m |
| Profit | €6.0m |
| Calculation | 4.2 ÷ 6.0 |
| Result | 0.70 |
30% of the profit did not arrive as cash. Before congratulating anyone on the year, find out which part of working capital absorbed €1.8m.
04 What moves it
Four things that actually change this number
Working capital
The usual culprit when the ratio falls: cash trapped in customers and stock.
Revenue recognition
Recognising early lifts profit long before the cash arrives.
Provisions and accruals
Non-cash charges push the ratio above 1.0 without anything improving.
Growth
Fast growth mechanically depresses the ratio while working capital builds.
05 Where the number lives
The system, the record and the fields
| System of record | Key record | Fields you need |
|---|---|---|
| Cash flow statement and the P&L, from consolidation | Reporting unit | operating_cash_flow, net_income, working_capital_movement |
Use the same consolidation scope for both. A ratio built from group cash and entity-level profit is meaningless, and it happens more often than anyone admits.
06 How it goes wrong
Three ways this metric misleads people
Reading one period in isolation
A single quarter swings on timing — one large receipt either side of a period end moves it.
Fix: Use a rolling twelve months, and look at the trend.Assuming above 1.0 is always good
It can mean large non-cash charges, or that you have simply stopped investing in working capital because volumes are falling.
Fix: Read it with the growth rate next to it.Mixing definitions
Free cash flow ÷ EBITDA and operating cash flow ÷ net income both get called cash conversion.
Fix: Pick one, define it, and put the formula on the report.08 Questions
Frequently asked
What does a cash conversion ratio below 1 mean?
Profit is not becoming cash. Usually working capital is absorbing it — customers paying later or stock building. Occasionally it means the earnings themselves were soft.
Which definition should we use?
For operating discipline, operating cash flow ÷ net income. For debt and valuation conversations, free cash flow ÷ EBITDA is more common. What matters is that everyone uses the same one.
One definition, everywhere it is used
SCIKIQ stores this metric once and serves it to every dashboard, board pack and agent that asks.