Cash conversion cycle and free cash flow

Cash conversion cycle and free cash flow

The cash conversion cycle measures the time it takes for a company to convert its inventory into cash flows, thus shows the effectiveness of management. CCC depends on accounts receivable and accounts payable with a lower value providing more significant advantages for the company. The Home Depot Inc. financial statement highlights the metrics dictating the cash conversion cycle. We see that the days’ inventory outstanding increased from 69.9 to 71.5 in 2018. However, the daysales outstanding decreased from 7.1 days in 2017 to 6.5 days in 2018. Finally, the day’s payable outstanding was more stable with a slight increase. In total, the cash conversion cycle increased, meaning that the company is deteriorating in the market share. An increase in CCC, which indicates a worsening value, shows that the company takes longer days to convert its inventories into cash; therefore, they tend to lack appropriate financial capacities to further their investments.

Based on the cash conversion cycle for home depot INC, an increase in day inventory Outstanding shows that the company is taking many days to sell its stock. Prudent marketing criteria are, therefore, appropriate to inform relevant remediation patterns. The Days Sales outstanding is on a reducing trajectory, indicating that the number of days required in collecting cash after sales is reducing. This is positive for the company as cash for reinvestment will be available within a shorter period.  The DPO also increases, meaning that the company is taking a long time to pay its bills.  This enables the company to hold cash for the long money required for any investing capacity. However, there is no significant difference in this value from the previous year showing that the value should always be limited to a specific timeframe appropriate to all stakeholders..

The free cash flow for Home Depot Inc. provides significant insight into understanding the company’s statements. Free cash flow is the cash that a company generates after capital assets and support operations are catered for.  From the metrics, the company recorded cash from operations as $ 13,038 in 2018, an increase from $12,031 in 2017. Capital expenditures also increased from $ 2,442 in 2018 from $ 1897 in 2017. From the metrics, it turns out that the conversion of inventories is yielding significantly to the business.

In monitoring the free cash flow, I have learned that the company can determine its cash conversion cycle. It also provides insights on the company value and health based on the trends, which for this case, is a positive trend as there is an increase from the previous year. Secondly, free cash flow accounts for cash from all operations, which includes plant, equipment, property, among other products. This parameter can, therefore, illustrate how an individual component contributes to the total cash flow patterns for the company and inform relevant changes if there is a need.

Home Depot, Inc. The company’s free cash flow system and cash conversion cycle enlighten us on the diverse parameters informing the success of a business as they enable observation of trends. Investors are always keen on the inventory turnover that a company records involving sound marketing plans that will not only inform the production but also profitability. In this regard, the two measuring metrics give an overview of the state of the company and provides a baseline for any investment decision or proposed future changes necessary for continuous growth.