What does the cash conversion cycle measure?

The cash conversion cycle is a crucial metric that measures how efficiently a company converts its investments in inventory and accounts receivable into cash. Specifically, it focuses on the duration it takes for a company's inventory to be converted into cash through sales.

This cycle consists of three primary components:

1. Inventory turnover - the time taken to sell inventory.
2. Accounts receivable collection period - the time taken to collect cash from customers after a sale.
3. Accounts payable period - the time taken to pay suppliers for purchased inventory.

The cash conversion cycle is calculated by adding the inventory conversion period to the receivables collection period, and then subtracting the payables deferral period. By focusing on the duration it takes to convert inventory into cash, the cash conversion cycle provides a clear picture of the efficiency of a company’s operational processes. A shorter cycle indicates that a company is able to quickly recoup its cash, thus improving its liquidity and overall financial health.

The other choices focus on aspects of the business's financial reporting and processes but do not encapsulate the specific and comprehensive measure that the cash conversion cycle represents.