5 for Fast Cash

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 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 not only to make a quick sale but to 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 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 to pay its suppliers. The cash conversion cycle, or CCC, equals DIO + DSO-DPO.

Last time out, we looked at four computer makers. This week we'll examine a handful of electronics stores:

We immediately see that Best Buy is far and away the leader in turning its products into cash -- almost three times faster than its nearest competitors. While Conn's is zippy in moving its inventory out the door and getting paid for it, it's in power over suppliers that Best Buy reigns supreme.

The cash conversion cycle helps explain why Best Buy is the top electronics retailer. Its operation is lean and fast-moving, with products moving off the shelves speedily. The electronics giant also gets paid right away, but dawdles when it comes to paying its suppliers for the goods they give. Consumers want what Best Buy sells, and suppliers are willing to wait to get paid, knowing they'll be tapped again for reorders.

The real surprise here is specialty retailer Conn's, with a market cap of just $540 million. Operating 58 stores in just two states -- Texas and Louisiana -- it's dwarfed by Best Buy's $23 billion price tag, yet it's also able to turn its inventory into cash in just less than a month. Probably because of its size, though, suppliers demand tougher terms from the retailer.

The Foolish advantage
Conn's performance might be why Motley Fool CAPS investors have given it top ratings, knowing that size doesn't mean everything. Selection and service come into play, too. Here's what Fools are saying over at CAPS about Conn's:

• All-Star CAPS player Patrick6k says, "I love this company, not just from an investing standpoint, but also from a customer's point of view. I've bought appliances and the like from Best Buy and Circuit City and then I've bought them from Conn's. It's like a whole different world. Their sales staff brings new meaning to knowledgeable. They also have an in house credit program that is unmatched."
• Another top-rated All-Star, jinw4672, says, "Conn's current situation largely affected by Katrina and redevelopment political issues. Once the storms over and redevelopment starts, people will have to buy more electronics that the hurricane have destroyed. I see great boost in future growth in redevelopment of Louisiana, and Conn's will continue to grow with it."

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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.