Cash conversion cycle
Previously, we saw that AK Steel’s (AKS) cash flows improved in the first half of the year. One of the contributors to AK Steel’s cash flows was the reduction in working capital. Working capital is defined as current assets minus current liabilities. AK Steel’s cash conversion cycle also came down as a result of lower working capital requirements.
The cash conversion cycle measures a company’s working capital in the number of days. Cash is utilized in inventory and receivables while payables act as a source of funds. The cash conversion cycle tells us how many days cash is tied up for in a company’s operations before it’s converted to cash again.
AK Steel’s cash conversion cycle improves
The previous chart shows AK Steel’s cash conversion cycle. As you can see, it came down in 2Q15. Typically, AK Steel’s cash conversion cycle goes up in the first half of the year as it builds working capital to serve its customers in the remaining half of the year.
However, this year AK Steel has managed to bring down its working capital requirements in the first half of the year. This has helped improve its cash flows. More than half of AK Steel’s 2Q15 operating cash flows were attributable to lower working capital requirements.
U.S. Steel (X) has also been aggressive on its cash conversion cycle under its Carnegie Way program. U.S. Steel currently forms 3.9% of the SPDR S&P Metals and Mining ETF (XME). Together, Nucor (NUE) and Reliance Steel & Aluminum (RS) form ~10.4% of XME’s portfolio.
In the next part, we’ll discuss more about AK Steel’s cash conversion cycle.