How Quickly Is the Cash Coming at United Natural Foods?

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 United Natural Foods (Nasdaq: UNFI  ) .

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 United Natural Foods for the trailing 12 months is 51.4.

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 United Natural Foods, consult the quarterly-period chart below.

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

On a 12-month basis, the trend at United Natural Foods looks less than great. At 51.4 days, it is 4.6 days worse than the five-year average of 46.8 days. The biggest contributor to that degradation was DIO, which worsened 7.7 days when compared to the five-year average.

Considering the numbers on a quarterly basis, the CCC trend at United Natural Foods looks good. At 50.6 days, it is little changed from the average of the past eight quarters. With quarterly CCC doing better than average and the latest 12-month CCC coming in worse, United Natural Foods gets a mixed review 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 underappreciated home run stocks.

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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. The Motley Fool has no positions in the stocks mentioned above. 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.


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  • Report this Comment On December 26, 2012, at 9:06 AM, leaderoftheback wrote:

    Always interesting numbers, Seth. I would suggest in this case that what you see as mixed indicators are simply indications of growth.

    The nature of distribution requires UNFI to take in and hold inventory until the end customer asks for it. The cash requirement to accomplish this falls largely on UNFI. A growing distributor will always be adding inventory that will, for some time, remain undelivered and therefore unsold (DIO increases), especailly to new (large) customers. The new customers will require new and/or different items; sometimes not salable to other UNFI customers (think private label). Until they take the new inventory out of UNFI's hands and convert it to a receivable, CCC will look progressively poorer.

    And speaking of receivables, larger welll established new customers (any large grocery chain) often demand longer payment terms. That will also impact all of these numbers (and point to the single greatest risk to distributor's profits).

    Make sense?

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