We've 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 you how quickly a company takes its raw materials, makes them into products, and turns sales into cash in the bank. 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. 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 a quick sale, but get paid for it 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 tend to take our sweet time paying our bills. By slowly paying suppliers, a company has more time to use its cash to earn interest, so we want this number to be higher.
DPO = 365 days/(cost of goods sold/accounts payable)
We don't need an average of our bills outstanding here; we just need to know the ending number.
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.
Last time out we looked at five electronics retailers. This week we're going to tap a keg of breweries:
|
Company
|
DIO
|
+
|
DSO
|
-
|
DPO
|
=
|
CCC
|
CAPS Rating (out of 5)
|
|
Anheuser-Busch (NYSE: BUD)
|
24.2
|
|
16.3
|
|
47.9
|
|
(7.4)
|
***
|
|
Molson Coors Brewing (NYSE: TAP)
|
37.4
|
|
43.5
|
|
42.2
|
|
38.7
|
***
|
|
Boston Beer (NYSE: SAM)
|
46.1
|
|
17.4
|
|
42.8
|
|
20.7
|
***
|
Data provided by CapitalIQ, a division of Standard & Poors, and Motley Fool CAPS.
As we're coming to expect looking at these companies, there's always one standout amongst the crowd, whether for good or ill. This time, Motley Fool Inside Value recommendation Anheuser-Busch leads the way in converting its raw materials into cash. In fact, it has a negative cash conversion cycle.
How can that happen? It's moving its wares off the shelves faster than anyone else and converting them into cash. The real charm is in its power to drag out payments for nearly six weeks. By holding onto that cash longer, it receives payments from its customers before it has to pay its own bills. That's marketplace power!
The Foolish advantage
Motley Fool CAPS investors, however, have a pretty even outlook for all the major breweries. Here's what they're saying about Anheuser Busch:
- All-star CAPS player FreethinkerKW has a checklist of why he believes there's always a reason to crack open another Bud. Here are a few of them:
"1. No. 1 beer brand in the USA....
8. Warren Buffet now owns 4.75% of shares for a $1.7 billion stake....
13. Just increased the dividend in Aug. 06 to .295 cents quarterly."
-
Cheathering has some particularly thoughtful reasons why Boston Beer, the maker of the patriotic Samuel Adams brand, is a winner:
The brewing industry is in a world of pain, with wine and spirits taking a lion's share of alcoholic beverage growth in the U.S. and ever-increasing consumer awareness of the adverse health effects of drinking beer.... Luckily for Boston Beer, they are well insulated against big swings in demand, as they use excess capacity at other brewers rather than investing in their own additional capacity, which can easily be forced to idle and needlessly eat into operating profits.
Got an opinion on Bud or Boston Beer? Will Molson Coors remain a threat? Work with tens of thousands of your fellow Foolish investors at Motley Fool CAPS right away at no cost to you.
Anheuser Busch is a recommendation of Motley Fool Inside Value. A 30-day risk-free trial subscription is available today.
Fool contributor Rich Duprey does not own any of the stocks mentioned in the article. You can see his holdings here. The Motley Fool has a disclosure policy.
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