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 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 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 a quick sale but also 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 want to take our sweet time paying our bills. By paying suppliers slowly, 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.

In the high-tech world of semiconductors, making the connection between inventory and cash might mean the difference between capturing market share and sharing the crumbs. Here's a look at how efficiently some of the leading pharmaceuticals are turning medicine into moola:









CAPS Rating (out of 5)

Johnson & Johnson (NYSE:JNJ)









Pfizer (NYSE:PFE)









Merck (NYSE:MRK)









Bristol-Myers Squibb (NYSE:BMY)









Schering-Plough (NYSE:SGP)









GlaxoSmithKline (NYSE:GSK)









Data provided by Capital IQ, a division of Standard & Poor's, and by Motley Fool CAPS.

Each week, we look for the top companies in different industries that make fast cash, and this group seems to have caught the eye of the nearly 29,000-strong Motley Fool CAPS database of ranked players.

Not every company that makes fast cash will excel. We want only those that the CAPS community thinks are the best. Four- and five-star stocks are the ones investors believe will outperform the S&P 500.

The Foolish advantage
Of course, this isn't a list of stocks to buy or sell. It's the jumping-off point for further research. CAPS investors seem to view the pharmaceutical industry favorably, except for Pfizer, which also is the laggard in converting its drugs into cash.

While Johnson & Johnson, Schering-Plough, and GlaxoSmithKline all enjoy similarly high ratings, GSK's negative conversion cycle jumps out. The British pharmaceutical is able to stretch out its payments for nearly a year, meaning that it is earning money on its cash for more than two months before it has to start paying out. Compare that with Pfizer, which takes about nine months to convert its raw materials into cash. Even so, GSK's stock has been a slacker when it comes to its rivals, trailing even Pfizer.

CAPS investor sentiment is generally universal that GlaxoSmithKline is a well-run pharma without the liability issues that afflict its rivals, such as Merck. Highly rated CAPS player dplindeman notes that GSK is a "good pharm company with the negative inertia plaguing Merck and Pfizer. Look for a good run."

TMFArkle concurs:

This is a quality pharma giant. CEO JP Garnier has done great work improving the R&D productivity, and the company looks set to be a great long-term winner. Not a bargain basement price, but quality is worth paying for. Only real downside is concerns that govts, including the US, will keep driving drugs prices down.

So will Glaxo finally live up to its potential and begin to reward investors as the CAPS community thinks? Work with tens of thousands of your fellow Foolish investors at Motley Fool CAPS to uncover the best stocks and convert your money into cash profits. Get started right away, at no cost to you.

GlaxoSmithKline and Johnson & Johnson are Motley Fool Income Investor recommendations. Pfizer is a Motley Fool Inside Value selection. A 30-day trial subscription gives your portfolio a booster shot with a look at all of the market-beating recommendations.

Fool contributor Rich Duprey owns shares of Merck but does not have a financial interest in any of the other stocks mentioned in the article. You can see his holdings here. The Motley Fool has a disclosure policy.