Term · Cash Flow & Working Capital
Cash conversion
In briefCash conversion describes how reliably an earnings measure such as EBITDA translates into operating or free cash flow. The term is not standardized, so the chosen variant must be stated.
Definition
Cash conversion describes how reliably an earnings measure translates into operating cash flow or free cash flow. The term is not standardized.
How it is calculated
Formula. Possible variants are operating cash flow ÷ EBITDA, operating cash flow ÷ EBIT or free cash flow ÷ EBITDA. The chosen convention must be stated. The metric is not standardized; the issuer's definition and delineation are decisive.
Why it matters for small caps
For small caps, cash conversion shows whether an optically good EBITDA is actually converted into liquidity or remains tied up in working capital.
Common misreadings
- Different variants are compared without being labeled. Working-capital fluctuations and leasing effects can heavily distort individual periods.
In the process
Frequently asked
What does cash conversion mean?
It shows what part of the reported earnings actually arrives as liquidity. Common reference figures are EBITDA, EBIT or free cash flow.
How is cash conversion measured?
You divide the operating or free cash flow by the chosen earnings measure and state the convention. For small caps this shows whether good EBITDA really turns into cash.
What source of error lies in cash conversion?
If different variants are placed side by side without labeling, a distorted picture emerges. Fluctuations in working capital and leasing effects also distort individual quarters considerably.
Related terms
Sources
Primary
IFRS Foundation – IAS 7 Statement of Cash Flows
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.