What is Cash Conversion Cycle and how to calculate?

Cash conversion cycle is the number of days it takes a company to convert its investment in inventory to cash. In short, it is a combination of following ratios:

• Inventory turnover in days (ITO)
• Receivables turnover in days (RTO)
• Payables turnover in days (PTO)

Formula for calculation is ITO+RTO-PTO. This should always be used in conjuction with in dept analysis of all the ratios involved as there is a possibility that a conversion cycle can give a distorted view due to extra ordinary fluctuation in any of the ratios.

Hope this answers your query.

agreed with mr fahad