Question

Is a decrease/steady cash conversion cycle a good or bad sign?

a) Good
b) Bad
c) Neither
d) Depends on the industry

Answer 1

A decrease/steady cash conversion cycle can indicate good or bad financial health depending on the context; it suggests effective management but could also signal possible future cash problems if due to aggressive sales tactics or underinvestment in inventory.

Step-by-step explanation:

The question revolves around the interpretation of the cash conversion cycle (CCC) and its implications on business health. A decrease/steady CCC can be a good or bad sign depending on various factors. The CCC measures the effectiveness of a company's management in turning its inventory and other resources into cash flows from sales. A decreasing or stable CCC generally indicates that a company is efficiently managing its inventory and receivables, which is a positive sign. However, if the CCC is decreasing because the company is not investing in inventory or is easing its credit terms excessively to boost sales, it could potentially signal future cash flow problems.

Regarding whether a decrease/steady CCC is a good or bad sign, the answer is d) Depends on the industry and the specific circumstances of the business. For instance, in industries with typically longer production cycles like aerospace or shipbuilding, a longer CCC may be normal, while for fast-moving consumer goods, a shorter cycle is generally preferable.

Answer 2

A decreasing or steady cash conversion cycle typically indicates efficient working capital management and is generally seen as a positive sign. However, what is considered a good CCC can vary by industry, and context matters when evaluating this metric.

Step-by-step explanation:

The cash conversion cycle (CCC) is a metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash through sales. The shorter this cycle, the more efficient a company is at managing its working capital. Therefore, answering whether a decrease or steady CCC is good or bad:

1. Decreasing CCC: Generally a good sign as it indicates the company is turning over its inventory quickly and collecting receivables faster, improving its liquidity.
2. Steady CCC: Can also be positive if the current cycle is efficient, indicating stable operations.
3. Depends on the industry: Each industry has its own norms for CCC, so a good CCC for one industry may not be good for another.

Ultimately, whether a decrease or steady CCC is good or bad depends on the context of the company's operational efficiency and industry standards.