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.

Last time out, we looked at three brewers. This week, we're going to take some laps with a few sporting-goods stores:









CAPS Rating (out of five)

Big 5 Sporting Goods (NASDAQ:BGFV)









Cabela's (NYSE:CAB)









Dick's Sporting Goods (NYSE:DKS)









Hibbett Sports (NASDAQ:HIBB)









Golfsmith (NASDAQ:GOLF)









Sources: CapitalIQ, a division of Standard & Poor's; Motley Fool CAPS.

As we're coming to expect looking at these companies, there's always at least one standout amongst the crowd, whether for good or ill. This time, it's probably not so surprising that industry leader Dick's is among the best performers, but what probably does raise a few eyebrows is Golfsmith, the operator of 62 retail stores selling golf and tennis apparel and equipment.

Considering its disappointing results lately, one might be tempted to think it wouldn't be doing as well, but we see that where it apparently shines is in its days sales outstanding. With DSO influenced by accounts receivable, looking at Golfsmith's SEC filings, we find that it consists mostly of reimbursements from credit card companies. Sales have been anemic -- same-store sales dropped more than 5% in the quarter -- so it just hasn't been ringing the register enough to have an influential number of receivables.

The Foolish advantage
Motley Fool CAPS investors, however, think the company to watch here is Motley Fool Hidden Gems recommendation Cabela's, with its four-star rating.

  • All-Star CAPS player degaston thinks Cabela's is the best-in-class play here. "Cabela's is a high quality retailer and a real partner to outdoorsmen everywhere in the USA and eventually throughout the globe. They are executing their strategy wisely and at the rate they're growing we can expect to see them earning $1 billion after taxes by 2012 which should give their current stockholders a ten-bagger. If there ever was a buy-n-hold stock it's this one. They are poised for success and their stock price is very reasonable."
  • KSchmidbauer agrees, noting, "When it comes to hunting and fishing supplies there are only two outlets that matter, Cabela's and Bass Pro Shops. It's a contest very similar to Home Depot and Lowe's, both are winners. Cabela's is publicly traded, BPS is not. So Cabela's it is. [It] will continue to grow as long as they maintain inventory control."

Cabela's, though, needs to watch out for creeping competition from mass retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), which have growing lines of sporting goods at discounted prices. The seasoned sportsman might not shop there, but a widening product selection might keep Cabela's from a significant improvement in inventory turnover.

If you've got an opinion on who will win out here, be a good sport and share it. 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.

Cabela's is a recommendation of Motley Fool Hidden Gems. Wal-Mart and Home Depot are recommendations of Motley Fool Inside Value.  

Fool contributor Rich Duprey owns shares of Wal-Mart but does not own any of the other stocks mentioned in the article. You can see his holdings here. The Motley Fool has a disclosure policy.