We've heard the mantra "cash is king," but a fistful of dollars today better deserves the royal treatment 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 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 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 teen apparel retailers. This week, we'll examine a handful of computer makers:









CAPS Rating (out of 5)










Hewlett-Packard (NYSE:HPQ)









Gateway (NYSE:GTW)


















TTM data provided courtesy of CapitalIQ, a division of Standard & Poor's, and Motley Fool CAPS. *Dell is delinquent in filing its last quarterly report; figures are as of August 31, 2006.

The first thing that jumps out is that Dell, Gateway, and Apple all have negative cycles. That means they command some special pricing power in the marketplace. Inventory isn't sitting around very long on the shelves, and people are paying quickly for these companies' products. On the flip side, Apple is especially able to delay paying its suppliers, holding onto its cash for nearly three months.

What's different about Hewlett-Packard, that it actually takes 25 days to turn products into cash? We need to remember that the company isn't only a computer maker. It makes printers too, along with storage and server technology. Those products don't jump off the shelves nearly as fast as computers do, which may explain why Hewlett-Packard's inventory turns are more than twice as long as its nearest competitor.

Yet Gateway computers aren't nearly as popular as the others -- either that, or it's had to agree to extended credit terms to sell its wares. Its receivables turnover is almost twice as long as Apple's, suggesting that people are more willing to pay up for iPods and Macs than Gateway computers.

The Foolish advantage
These days, computer makers are not the golden children of tech. Other than Apple and Hewlett-Packard -- which get just average ratings of three stars -- Motley Fool CAPS investors don't think much of the industry anymore. PC makers were once investor darlings, but here's what Fools are now saying over at CAPS about these companies:

  • rivetbill is glad he's an Apple shareholder, because it is winning "more and more market share in computers, OS, digital content sales. Everything they touch is fabulous."
  • Recognizing the recent turmoil at Dell, sallgeud believes that "with the return of the founder to the company, I see this possibly turning around... Relative to those it competes with, the P/E is low and should suffer less damage in an economic downturn."
  • CAPS All-Star WoodvilleDale thinks Gateway is "for speculators only," though he sees value in its $2 shares if it gets "bought out and rehabbed."

Got an opinion on Gateway's future? Will Dell rise with the return of Michael Dell? 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. Click here to get started today right away, at no cost to you.

Dell is a recommendation of Motley Fool Stock Advisor and Inside Value.

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.