Metric Explainer: CFO Conversion Ratio
CFO Conversion measures what percentage of a company's reported profits actually converts into real cash. It's the earnings quality lie detector. "Profit dik...
Simple definition
CFO Conversion measures what percentage of a company's reported profits actually converts into real cash. It's the earnings quality lie detector.
🗣️
"Profit dikha to diya, lekin cash aaya kya? CFO conversion batata hai."
Formula
CFO Conversion Ratio = (Cash from Operations (CFO)) / (Profit After Tax (PAT)) × 100
Good range
| CFO/PAT | Rating | Meaning |
|---|---|---|
| > 120% | Excellent | More cash than profit (depreciation + efficient WC) |
| 90–120% | Good | Most profit is real cash |
| 70–90% | Okay | Some WC drag, investigate further |
| 50–70% | Concerning | Significant cash-profit gap |
| < 50% | Red flag | Where is the cash going? |
Why they diverge — the 3 drivers
Most common culprit: Working capital
If a company grows revenue 20% but receivables grow 40% — cash is being consumed by customers who haven't paid. The company might show great profit but have no cash.
Sector context
| Sector | Typical CFO/PAT | Why |
|---|---|---|
| IT Services | 100–130% | Asset-light, clients pay upfront or on time |
| FMCG | 90–110% | Efficient working capital, sometimes negative WC |
| Manufacturing | 70–100% | Capex-heavy, inventory cycles matter |
| Real Estate | 30–60% | Revenue recognition vs actual cash collection lag |
| Infra/Construction | 40–70% | Long project cycles, retention money, WC-heavy |
Real example: Company with high profit but low CFO
| Metric | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Revenue | ₹1,000 Cr | ₹1,300 Cr | ₹1,700 Cr |
| PAT | ₹100 Cr | ₹140 Cr | ₹180 Cr |
| Receivables | ₹200 Cr | ₹350 Cr | ₹600 Cr |
| CFO | ₹80 Cr | ₹40 Cr | ₹-20 Cr |
| CFO/PAT | 80% | 29% | Negative |
Revenue and profit are growing. But receivables are growing faster — this company is booking revenue but not collecting cash. By Year 3, it has negative operating cash flow despite record profits.
What this could mean
Channel stuffing, aggressive revenue recognition, or weak collection. Eventually, either receivables are written off (profit hit) or cash dries up (funding crisis).
Red flags
- CFO/PAT below 70% for 3 consecutive years in a non-financial company
- CFO declining while PAT is growing (classic divergence signal)
- CFO volatile while PAT is smooth — management smoothing profits
- Negative CFO for a profitable company — very serious
Related metrics
- Working Capital Days — Breaks down where cash is stuck
- Free Cash Flow — CFO minus capex
- ROCE — Return quality requires cash backing