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I think that you've asked a real interesting question about the comparison
of the cash conversion cycle (CCC)to the flow ratio.

I can't say that I've studied it in much detail yet, but one thing that I think
can be behind the differences that you've found is that when we look at
the flow ratio we're looking at the actual balance sheet components of
current assets and liabilities. When we calculate CCC, we're comparing
receivables to sales, and inventory and payables to cost of sales.

The flow ratio is used to determine the relative strength that a company
has in dealing with its suppliers and customers. The CCC is used to see
how long it takes a company to turn a $1 of raw materials into a $1 of
cash. There's some overlap between the 2 concepts, but there are some
differences as well.


Thanks for the reply...

I still have a concern however that the Flow ratio
might not accurately reflect the current situation with
a high-growth company like Broadcom...

I compared growth in sales and inventory at Amazon.com
(AMZN) and at Broadcom (BRCM) and here's what I found:

Amazon.com
Growth in sales (year-over-year): 312%
Growth in inventory : 228%
Essentially, 73% of sales growth is backed up by
inventory growth...


Broadcom
Growth in sales (year-over-year): 450%
Growth in inventory: 272%
In this case, only 60% of sales growth is backed up
by inventory growth...


My point is this... the inventory growth that is
required to support such a high rate of sales growth
might inadvertently skew the Flowie against high-growth
companies like Broadcom... (have I said the word
"growth" enough times ?!?)...

Of course, this might be irrelevant because most RM
companies are not seeing this rate of sales growth, but
it makes you think... any thoughts?

-- Chad

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