We've all heard the mantra "cash is king." But a fistful of dollars today deserves the royal treatment more than a wad of cash down the road. We want our companies turning their products into cash -- fast!
The cash conversion cycle
Enter the cash conversion cycle. It tells us how quickly a company turns cash invested in inventory into cash in the bank after collecting credit sales from customers and paying off its suppliers. The faster a company can turn over its inventory, the more efficiently it's managing its assets. There are three components of the cycle, and here's how they operate:
-
Days Inventory Outstanding (DIO)
Inventory sitting on store shelves or in stockrooms is not doing the company, or the investor, any good. The number of days the inventory sits there measures how quickly management can get those Speedos off the racks and onto the beaches of Maui. Obviously, lower numbers are better.
DIO = 365 days/(cost of goods sold/average inventory)
-
Days Sales Outstanding (DSO)
Outstanding sales are those the company hasn't yet been paid for; they're languishing in accounts receivable. We want our companies to not only make quick sales, but also get paid for them right away. The faster, the better.
DSO = 365 days/(sales/average accounts receivable)
-
Days Payable Outstanding (DPO)
While we want customers to pay us quickly, we want to take our sweet time paying our bills. By paying suppliers slowly, cash available to spend on things it needs, like inventory, so we want this number to be higher.
DPO = 365 days/(cost of goods sold/average accounts payable)
Putting it all together
With the three pieces of the puzzle calculated, we can figure out how long a company is taking to get paid for the products its customers are buying from inventory, minus the number of days it takes it to pay its suppliers. The cash conversion cycle, or CCC, equals DIO + DSO-DPO.
Each week, we look for the top companies in different industries that make fast cash. While not every company that makes fast cash will excel, we generally only want firms that the CAPS community considers the best. Of course, this isn't a list of stocks to buy or sell -- just a jumping-off point for further research.
This time, we're focusing on large media companies.
|
Company
|
DIO
|
+
|
DSO
|
-
|
DPO
|
=
|
CCC
|
CAPS Rating
(out of 5)
|
|
Time Warner (:TWX)
|
25.8
|
+
|
46.1
|
-
|
28.4
|
=
|
43.5
|
**
|
|
News Corp. (NYSE:NWS)
|
37.9
|
+
|
69.8
|
-
|
83.0
|
=
|
24.7
|
****
|
|
Viacom (NYSE:VIA)
|
33.5
|
+
|
56.8
|
-
|
16.6
|
=
|
73.7
|
***
|
|
Disney (NYSE:DIS)
|
13.8
|
+
|
50.3
|
-
|
62.1
|
=
|
2.0
|
****
|
|
CBS (NYSE:CBS)
|
35.3
|
+
|
66.5
|
-
|
17.5
|
=
|
84.3
|
**
|
Source: Capital IQ, a division of Standard & Poor's.
When you're dealing with large media companies like these, you'll see that their numbers are all fairly similar ... until we get to their payables, where a few stand out. It's probably not a coincidence that these companies happen to be our top-rated stocks. The vast majority of CAPS investors believe that these four- and five-star stocks will outperform the S&P 500. Given that, let's take a closer look at the one company that looks a little "Goofy" in comparison to the others: Disney.
Accelerating Web content delivery -- and cash
Of course, Disney a media company, producing films, TV shows, and magazines, but it also operates in other discrete lines of business: entertainment and theme parks, consumer products, and more. The marketing muscle behind the Disney name gets the products moving fast, affording the House of Mickey the luxury of dawdling to pay its suppliers. Demand for Disney products keeps business brisk, as we can see from the low number of days in inventory.
More than 2,000 investors have cast their votes for Disney, and 93% believe the Motley Fool Stock Advisor recommendation will outperform the market, while 95% of All-Stars (CAPS investors who consistently outperform their peers over time) agree.
Top-rated All-Star alon2k5, with a 93.20 player rating, points out that the Disney name makes an impact beyond the U.S. alone. As an international investor, he sees it continue to exert its brand influence for years to come:
Walt Disney is one of the two biggest brand names (with Coca-Cola (NYSE: KO ) ) on this planet, I say this not as an American but as someone living on the other side of planet Earth. I think Disney is the first English word that billions of kids (outside [the] USA) are exposed to during their childhood.
With such a strong name, the company could almost be run by a monkey (or a Mouse...) and still outperform the S&P for ages. Well, it isn't run by monkeys, far from it. And with the [Pixar] buy and Steve Jobs joining the Mouse House, I believe Disney has assured it's out-performance over the S&P during my lifetime, and my kids' (still at school), and their kids' (not born yet)
OK, this is exaggerated, but putting money on [Disney] is not investing, it's making money with style. To infinity and beyond.
Don't be foiled again
So which company will continue to be the big star of cash creation? At Motley Fool CAPS, tell us your picks as you work with thousands of your fellow Foolish investors to uncover the best stocks, and convert your money into cash profits. Best of all, it's absolutely free -- get started today!
RSS Headlines
Fool UK