Quick cash

Here is a list of companies that have improved their cash conversion cycles during the past five years

Quick cash

The cash conversion cycle (CCC) tells us how much time a company takes to convert its raw materials into cash flows. The shorter the CCC, the better the cash management ability of the company. The CCC is calculated as follows:
Cash conversion cycle = Days of receivables + days of inventories - days of payable

Increasing sales and an improving CCC ensure that less working capital is required to generate additional sales.

An improvement in the CCC tells us the following qualitative aspects of a business:

  • Reduction in days of receivables indicates that a company's debtors are paying faster than earlier, which is a result of better pricing power, product quality or increasing dependence of customers on the company.
  • Reduction in days of inventories indicates increasing demand for a company's product.
  • Increasing days of payable provide the company payment flexibility. A higher credit period indicates that it can procure credit at favourable terms.

To further refine the list, we have ensured that the companies have positive cash flows from operations (CFO) during the past five years and the ratio of CFO and sales (which is an improved version of operating margin) is greater than 10 per cent during the past five years. One more filter used here is debt to equity ratio should be less than one.

Here is a list of companies that have improved their CCCs over the past five years while also increasing their sales at a rate of 5 per cent or more.

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