Cash conversion, explained simply
Two companies with the same EBITDA can generate very different cash. Buyers and lenders look for high and stable conversion. A sudden fall indicates that reported profit is not turning into cash and requires explanation.
Cash conversion is distinct from the cash conversion cycle, which measures the same dynamics in days using DSO, DIO and DPO.
Cash conversion, FY2025 against FY2024
IllustrativeAlder Creek Manufacturing
Conversion fell 24 points as customers were given longer payment terms and capital expenditure rose.
Calculation
FormulaCash conversion = (EBITDA − capital expenditure − increase in working capital) ÷ EBITDA
Worked example
| $ millions | FY2024 | FY2025 |
|---|---|---|
| Adjusted EBITDA | 4.2 | 4.6 |
| Capital expenditure | (0.5) | (1.0) |
| Increase in working capital | (0.5) | (1.2) |
| Cash generated | 3.2 | 2.4 |
| Cash conversion | 76% | 52% |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Lenders and buyers weight cash, not accounting profit. A sustained decline in conversion changes both debt capacity and value.
Red flags
- Conversion falling as revenue grows
- Unusually high conversion just before the sale, for example from delayed supplier payments
- Large unexplained swings between years
Frequently asked questions
What is cash conversion in M&A?
Cash conversion measures the proportion of a company’s EBITDA that is converted into cash after capital expenditure and working capital movements, usually expressed as a percentage of EBITDA.
What is a good cash conversion rate?
It depends on the industry. Asset-light service businesses usually convert more than manufacturers.
Is it the same as the cash conversion cycle?
No. The cash conversion cycle measures days, using DSO, DIO and DPO.