In finance, will higher margin companies (IBM) have a longer cash conversion cycle than a lower...

In finance, will higher margin companies (IBM) have a longer cash conversion cycle than a lower margins companies (Proctor and Gamble)?

Thank you.

Expert Solution

It is not mandatory that higher-margin companies have a longer cash conversion cycle than a lower margins company but in some cases, it may be.

The cash conversion cycle is defined as the time difference between the selling of inventory and accounts receivable versus the accounts payable.

The smaller the duration in which the company completes its inventory and receives the receivable the better the cash conversion cycle.

If we consider consumer behavior when the product is available cheap in the market then the consumer tends to buy more and this will increase the cash conversion cycle but that depends upon segment to segment. We cannot compare the CCC of one segment with another.

Like in the given example we cannot compare the CCC of IBM with P&G as both are from different segments.

It is only comparable when the companies are in the same segment, if we compare IBM and Apple and P&G with Unilever then it makes sense in this comparison the company which will be having a higher margin will have a longer cash conversion cycle.

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