Cash conversion: explain the gap below EBITDA

The conversion of EBITDA into cash explains how accounting performance relates to financial flows. I would start by defining the flow studied: before or after taxes, capex, interest and exceptional items. Saying that a company converts 80 % of its EBITDA is not sufficiently precise if the numerator is unknown. Free cash flow should not be confused with simplified operational flow.

NWC shifts can be normal in a growth phase or reveal a recovery difficulty. An increase in receivables is not automatically a loss, but it consumes cash. Due diligence must understand the drivers and their persistence. A good accounting result does not guarantee that the company can finance its activity or service its debt.

I would reconcile the initial result then the variations in operational items, isolating non-monetary movements, acquisitions and currency effects. The gross change in the balance sheet may be different from a cash movement. The signs must be controlled: increase in an operational asset generally consumes cash, increase in an operational liability brings cash, under bridge conventions.

The flow must then be linked to cash and other categories of movements. Tax payments, investments and interest are presented separately when the measure studied excludes them. Comparison between periods requires the same definitions and consistent treatment of non-recurring items. I wouldn't start with an adjusted EBITDA without explaining the differences with actual expenses paid.

I would relate the variations to sales, purchases and seasons. Receivables may increase with growth, customer delays or early billing. Merchandise inventories may reflect seasonal preparation or obsolescence. Extending suppliers can temporarily improve cash flow while deferring an obligation. Aggregate ratios require comparable populations and periods.

Receivables or supplier financing can change the appearance of the flow. It is necessary to examine contracts, recourses and accounting presentation, then discuss the effects of the transaction. The goal is to understand recurring generation and future needs, not to characterize any adverse variation as abnormal. Sustained growth may require sustainable financing even with good QoE.

In a simplified example, EBITDA is 3 M€. The increase in receivables and merchandise inventories consumes 0,8 M€, while the increase in suppliers brings 0,2 M€. The flow considered is therefore 2,4 M€, or 80 % of EBITDA. The assumptions here exclude other non-monetary and operational movements; you have to check them in a real file.

This amount is not free cash flow since it is calculated before taxes and capex. It also does not constitute the cash available to shareholders after financing. The restitution must name the measure. Then adding taxes or investments in a comment without redoing the bridge can make the comparison inconsistent.

I would ask what explains the 0,8 M€: growth, delays, season or unsaleable stock of goods. I would also examine whether supplier 0,2 M€ will be settled quickly. The same ratio of 80 % can correspond to very different qualities of cash generation. Root cause analysis is more informative than percentage alone.

Forecasts must link volumes, deadlines and investments, with visible hypotheses. I would use sensitivities on collections, turnover and payments rather than a single historical rate applied to any scenario. Growth needs and transition costs can make future cash flow different from the past. Financing conditions should be addressed in their place.

The final presentation should keep the historical bridge and the scenarios separate. A one-off recovery problem can be resolved; a structural business practice may persist. Management responses should be corroborated where possible. Data limitations remain significant if balance sheet movements cannot be reconciled.

AI can help classify movements and find explanations in documents. I would test acquisitions, currencies and payments which modify the balance sheets without corresponding to the simplified bridge. A system must maintain conventions and report unexplained deviations.

In Solenor, I would look for verifiable calculations and management questions related to the sources. The conclusion must explain the economic financing of the activity, not just generate a percentage. The judgment remains that of the professional who reviews the data and their limits.