Cash conversion rate

The cash conversion rate measures a company's ability to turn its economic profit into cash actually available. It is most often calculated by dividing operating cash flow, or Free cash flow, by EBITDA. A rate close to 100% reflects an activity that is light on working capital and renewal investment; a durably low rate signals instead that accounting profits convert poorly into cash.

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This indicator is central to financial due diligence, because it reveals earnings quality far better than margin alone: two companies with the same EBITDA can show radically different cash profiles depending on their operating cycle, their CAPEX (capital expenditure) policy and the seasonality of their business. A buyer reads it as a gauge of the cash genuinely available to service acquisition debt.

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For example, a services company reports 5 MCHF of EBITDA and 4.5 MCHF of operating cash flow, a 90% conversion. An industrial company with the same EBITDA but tying up 2 MCHF in working capital and investment converts only 3 MCHF, or 60%, and will logically command a lower price.

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For an SME owner, improving cash conversion, through better management of the Working capital or investment discipline, directly strengthens the perceived value of the business and its ability to self-fund growth.