← Business Metric: Financial (all topics)
Operating cash flow to EBITDA & to PAT
What it is
Cash generated from operations expressed against reported EBITDA and against profit after tax. It tests whether accounting profit is converting into money at a normal rate
A business reporting strong profit while converting little of it into cash is the single most common pattern preceding financial distress
Impact on industries
- The most useful earnings-quality test available from published accounts, and it needs no adjustment or assumption
- Conversion consistently near or above one indicates profit backed by cash rather than by receivables and inventory
- Persistent conversion well below one points to working capital absorption, aggressive revenue recognition or capitalised costs
- A single weak year can reflect genuine growth investment in working capital, so the multi-year trend matters more than any one period