Cash conversion
What it measures¶
Cash conversion asks how much of a company's reported profit arrived as cash. It adds up three years of operating cash flow (cash from running the business) and three years of net income (the bottom line of the income statement) and divides the first by the second. The check asks: is the result at least 1.0 — did cash at least match profit over three years?
Why it is on the page¶
Profit includes estimates — sales booked before the customer pays, costs spread over several years. Over time, a healthy business turns its profit into at least as much cash. Three years smooth out the timing of single payments around a year-end. Joseph Piotroski's checklist and James Montier's list of six warning flags both use this comparison.
Thresholds, their source and the population they were fitted on¶
| Result | When |
|---|---|
| ✓ passed | three-year operating cash flow ÷ three-year net income is 1.0 or more |
| ✕ failed | it is below 1.0 |
| ○ not evaluable | the cash flow or the net income of one of the three years is not stored |
| ○ not applicable | net income over the three years is zero or a loss |
- Source: the sign of Piotroski's accrual check (
F_ACCRUAL, Piotroski 2000); the first of Montier's six "C-score" flags (Montier 2008). - Fitted on: Piotroski — US companies priced low against the equity on their balance sheet, 1976–1996; Montier — US and European companies, 1993–2007.
- Evidence grade: peer-reviewed and replicated.
- Basis: absolute.
A worked example¶
Honeywell International, fiscal years 2023 to 2025 (statements stored on 25 October 2026): operating cash flow came to 1.11 times net income — passed.
NuScale Power over the same years made a loss, so there was no profit to convert: the check was not applicable and left the count.
What “No verdict” means here¶
The check is not evaluable when one of the three years lacks its operating cash flow or net income; it is not applicable when the three years together made no profit — dividing cash by a loss says nothing useful. Either way it leaves the area's count and the reason is named.
What the verdict is and is not¶
A pass says profit was backed by at least as much operating cash over three years. It is not a measure of how large the profit is, not a forecast, and not an instruction to trade the shares. The related, single-year accruals check is counted in Earnings quality.