A Hidden Reason That Hecla Mining's Earnings Are Outstanding

It takes money to make money. Most investors know that, but with business media so focused on the "how much," very few investors bother to ask, "How fast?"

When judging a company's prospects, how quickly it turns cash outflows into cash inflows can be just as important as how much profit it's booking in the accounting fantasy world we call "earnings." This is one of the first metrics I check when I'm hunting for the market's best stocks. Today, we'll see how it applies to Hecla Mining (NYSE: HL  ) .

Let's break this down
In this series, we measure how swiftly a company turns cash into goods or services and back into cash. We'll use a quick, relatively foolproof tool known as the cash conversion cycle, or CCC for short.

Why does the CCC matter? The less time it takes a firm to convert outgoing cash into incoming cash, the more powerful and flexible its profit engine is. The less money tied up in inventory and accounts receivable, the more available to grow the company, pay investors, or both.

To calculate the cash conversion cycle, add days inventory outstanding to days sales outstanding, then subtract days payable outstanding. Like golf, the lower your score here, the better. The CCC figure for Hecla Mining for the trailing 12 months is -1.9.

For younger, fast-growth companies, the CCC can give you valuable insight into the sustainability of that growth. A company that's taking longer to make cash may need to tap financing to keep its momentum. For older, mature companies, the CCC can tell you how well the company is managed. Firms that begin to lose control of the CCC may be losing their clout with their suppliers (who might be demanding stricter payment terms) and customers (who might be demanding more generous terms). This can sometimes be an important signal of future distress -- one most investors are likely to miss.

In this series, I'm most interested in comparing a company's CCC to its prior performance. Here's where I believe all investors need to become trend-watchers. Sure, there may be legitimate reasons for an increase in the CCC, but all things being equal, I want to see this number stay steady or move downward over time.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of the seasonality in some businesses, the CCC for the TTM period may not be strictly comparable to the fiscal-year periods shown in the chart. Even the steadiest-looking businesses on an annual basis will experience some quarterly fluctuations in the CCC. To get an understanding of the usual ebb and flow at Hecla Mining, consult the quarterly-period chart below.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Based only on the raw number, Hecla Mining has achieved the enviable feat of running a negative CCC cycle. That is, it typically collects what is owed it before it pays what it owes to others. On a 12-month basis, the trend at Hecla Mining looks very good. At -1.9 days, it is 24.5 days better than the five-year average of 22.6 days. The biggest contributor to that improvement was DIO, which improved 33.6 days compared to the five-year average. That was partially offset by a 15.9-day increase in DPO.

Considering the numbers on a quarterly basis, the CCC trend at Hecla Mining looks good. At -19.4 days, it is 30.9 days better than the average of the past eight quarters. With both 12-month and quarterly CCC running better than average, Hecla Mining gets high marks in this cash-conversion checkup.

Though the CCC can take a little work to calculate, it's definitely worth watching every quarter. You'll be better informed about potential problems, and you'll improve your odds of finding the underappreciated home run stocks that provide the market's best returns.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2012, at 11:26 PM, clbjblk wrote:

    Why do you not mention that there is a class action lawsuit against HL for not playing by the SEC. rules or if Federal Class Action lawsuits filed in Federal courts are just a gag order till after the fact ,I did not say there was any decision on this case but do you think the readers should have to find that out for there self , and that if you owned HL stock your deadline to put your name in the hat is April 2 2012, or miss the train and do it by yourself,or does that not factor into the CCC charts,this is the USA and nobody is guilty unless we do not put this out in the open or is it just right or wrong to just getting pushed under the rug if it is not brought up and I am still long HL but I know the CCC chart might not care when it should.I found out from federmanlaw.com and now will wait for the truth. Thanks for the article but April is just around the corner and it might be a good thing if some of the fools have an interest in HL.

  • Report this Comment On February 27, 2012, at 9:21 AM, pgmomni wrote:

    How can we calculate the potential or likely cost to Hecla of the class-action suits.

    I am sure HL has quantified the potential amount. If they believed there was a high probability of losing the suits they should set aside a reserve.

    Or do they have a liability policy to cover the costs?

    Pete

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