What is Cash Conversion Cycle: Definition & Meaning Explained

Definition of Cash Conversion Cycle

A Cash Conversion Cycle (CCC) tells you how many days it will take to convert a company’s inventory or resources into cash. The formula for Cash Conversion Cycle is:

Cash Conversion Cycle = (DIO + DSO) – DPO

DIO: Days Inventory Outstanding is the average number of days it takes for a company to turn inventory into cash through sales
DSO: Days Sales Outstanding is the average number of days it takes for a company to collect its receivables
DPO: Days Payable Outstanding is the average number of days it takes fo a company to fulfil its obligations or payables

Anchoring and Adjustment

Anchoring is a bias that drives people to make decisions that are based on (anchored to) pre-existing notions, ideas, and suggestions that may or may not be true.

Adjustments around anchoring are common as it becomes a starting point for many when it comes to decision-making.

For example, someone is anchored to a financial model or strategy. They may choose to use the anchor in situations where it may not fit and as a result, may end up getting an unfavorable outcome.

Circuit Breaker

A circuit breaker or market curb is a measure that exchanges use to put a stop to all trading activities across an index or entire market. This regulatory measure is put in place to curb panic selling, especially when markets are in free fall.

That’s why circuit breakers are also known as trading curbs and are put in place when an index or market reaches a specific level. These are the current circuit breaker limits on NSE:

Circuit Breaker Trigger	Trading Halt Duration
10%	0-45 minutes
15%	45 minutes; 1 hour 45 minutes; rest of the day
20%	Rest of the day

Holding Company

A holding company is a parent organization that holds a controlling interest in one or more subsidiary companies. The goal of a holding company is not to create products or services but to hold financial securities, typically in the form of equity, in other companies that create products or services. For example, Raise Financial Services is a holding company while Dhan is its subsidiary.

Fibonacci Retracement

A Fibonacci Retracement is a predictive technical indicator that is used to determine possible direction or trend reversal of a stock or index’s price with horizontal lines for potential support as well as resistance levels.

Fibonacci retracement in action

The logic behind tuning to a Fibonacci Retracement is the assumption that prices will reverse direction towards a previous price-level, especially after a new trend is in motion.

Debt To Equity Ratio

The debt to equity ratio is a measure of a company’s financial health that’s calculated by dividing liabilities from shareholder equity.

Debt to equity ratio: Total liabilities / Shareholder equity

A high debt to equity ratio means that a company is taking on more debt to run its business. A low debt to equity ratio means that a company is operating at low debt.

That’s why investors calculate the D/E ratio to understand a company’s ability to operate without debt. Generally, D/E is used for comparative analysis within sectors, not across industries because the ideal debt ratio may vary.

Call Option

A call option is a type of derivative contract that gives the right but not the obligation to buy an underlying asset like shares, commodities, currencies, and others at a pre-agreed price and date.

There are three components to a call option:

Premium: the price paid to buy a call option
Strike price: the pre-agreed price of the underlying asset
Expiration date: the day after which the option contract will be worthless