6 Stocks for Fast Cash

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 Malibu. Obviously, lower numbers are better.
    DIO = (average inventory/annual cost of goods sold) * 365 days
  • Days Sales Outstanding (DSO)
    The company hasn't yet been paid for outstanding sales; 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 = (average accounts receivable/annual sales) * 365 days
  • 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 more slowly, our cash available to spend on things we need, like inventory. So we want this number to be higher.
    DPO = (average accounts payable/annual cost of goods sold) * 365 days

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.

Anytime you're dealing with Internet-based companies, you'll find that their business models are very light on inventory. That holds true for these search companies, so let's see how they're finding the fastest way to bring home the cash.

Company

DIO

+

DSO

-

DPO

=

CCC

CAPS Rating (out of 5)

Baidu.com (NASDAQ:BIDU)

0.0

+

9.5

-

0.0

=

9.5

***

Google (NASDAQ:GOOG)

0.0

+

35.6

-

13.4

=

22.2

**

Yahoo! (NASDAQ:YHOO)

0.0

+

46.3

-

18.4

=

27.9

***

Sohu.com (NASDAQ:SOHU)

0.0

+

70.2

-

11.4

=

58.8

***

Sina (NASDAQ:SINA)

0.0

+

75.7

-

4.7

=

71.0

***

Source: CapitalIQ, a division of Standard & Poor's.

Each week, we look for the top companies in different industries that make fast cash. It seems that the 75,000 participants in the Motley Fool CAPS investor intelligence database haven't rung up much support for these particular firms; almost all rate a middling three stars or less. Of course, this isn't a list of stocks to buy or sell -- just a jumping-off point for further research.

Searching for clues
There are a number of interesting things to be found in this week's list, including three of the search engines' Chinese origins. But that's not really complete. Both Google and Yahoo! also have a Chinese presence, although Baidu.com is far and away the leader there.

Another thing about Baidu: It doesn't list any accounts payable, so its cash cycle is actually higher than it otherwise would be, since payables outstanding get subtracted in our equation. If that figure were in the teens, as it is for most of its competitors, Baidu.com would be sporting a negative cycle. As we've seen in the past, that points to a powerhouse of a company, one that gets paid upfront before having to shell out any cash of its own.

More than 1,900 investors have cast their votes for Baidu.com, and 83% believe the Motley Fool Rule Breakers recommendation will outperform the market. Some 84% of All-Stars -- CAPS investors who consistently outperform their peers over time -- agree. Top-rated CAPS All-Star TMFBreakerJava, with a 99.45 player rating, admits that he's late to the party, but says he finally understands the demographics underpinning Baidu.com:

I am joining with the party already in full swing. It took me a long time (the stock has doubled twice) to overcome my reticence to buy such an 'expensive' stock. I am a growth investor and should be used to paying for the first derivative, but a certain skepticism for things Chinese has cost me a lot of CAPS points as well as a lot of money. I finally get it: This is the dominant search engine in the world's most populous country with one of the world's fastest growing economies. Translation: They have a license to print money. We should all own a piece of that.

Of course, a number of investors are concerned about high valuations. But in the search for companies that are cashing in, Baidu.com is a leader.

Don't be foiled again
So which company will continue to be the big star of cash creation? Share your picks with us at Motley Fool CAPS! You'll 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!


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