4 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 more quickly 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 = 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, there's 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.

When you're dealing with information technology, as we are here with these Internet-services firms, you notice that there's no inventory -- so their cash cycles tend to be different from what we're used to seeing.

Company

DIO

+

DSO

-

DPO

=

CCC

CAPS Rating (Out of 5)

Akamai (NASDAQ:AKAM)

0.0

+

55.4

-

127.5

=

(72.1)

****

SAVVIS (NASDAQ:SVVS)

0.0

+

21.2

-

42.3

=

(21.1)

**

NaviSite (NASDAQ:NAVI)

0.0

+

40.9

-

19.8

=

21.1

**

VeriSign (NASDAQ:VRSN)

0.0

+

59.1

-

18.0

=

41.1

***

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

Of course, this isn't a list of stocks to buy or sell -- just a jumping-off point for further research.

Each week, we look for the top companies that make fast cash. Not every company that makes quick money will excel, so we generally want to find only the ones that the Motley Fool CAPS community considers the best. Four- and five-star stocks are the ones the vast majority of CAPS investors believe will outperform the S&P 500. Therefore, we'll look today at Akamai.

Accelerating Web-content delivery -- and cash
In these inventory-light businesses, we see that most of the companies collect their bills in a relatively similar time span, so the payables become the determinant. Normally, as we already noted, freeing up cash by paying bills slowly lets a company use that money to buy inventory. However, here we have companies that produce lots of excess cash and generally were generators of positive free cash flow.

More than 1,700 investors have cast their votes for Akamai, and 95% believe the Motley Fool Rule Breakers recommendation will outperform the market, while a like number of All-Stars -- CAPS investors who consistently outperform their peers over time -- agree.

CAPS All-Star Ludraman1, with a 97.39 player rating, points out that the dynamics of growing a Web business positions Akamai for outperformance:

This is a buy if you believe in:
- outsourcing
- fast growing web businesses (itunes, myspace, surfcontrol)

Companies with very fast growing web businesses like to outsource the delivery of their content so they don't have to keep ramping their infrastructure. This is what Akamai helps companies to do. They've acquired a number of companies so they have more offerings to go back to customers with and more to offer new customers.

Don't be fooled again
So which company will continue to accelerate the creation of cash? 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 -- so get started today!


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