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 us how quickly a company turns cash invested in inventory into cash in the bank after collecting credit sales from customers and paying off its suppliers. 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 quick sales, but also get paid for them 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 leaves more cash available to spend on things it needs, like inventory, so we want this number to be higher.
DPO = 365 days/(cost of goods sold/average accounts payable)
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.
The discount and middle retail industry has been a particularly strong area. Many of the companies in this segment have seen their stock prices appreciate by considerable amounts year over year. Here's a look at how a number of the best-known retailers servicing customers in these markets turn their retail operations into cash.
|
Company |
DIO |
+ |
DSO |
- |
DPO |
= |
CCC |
CAPS Rating (out of 5) |
|---|---|---|---|---|---|---|---|---|
|
Kohl's (NYSE:KSS) |
92.9 |
+ |
0.0 |
- |
33.5 |
= |
59.4 |
** |
|
TJX (NYSE:TJX) |
73.1 |
+ |
3.2 |
- |
40.1 |
= |
36.2 |
*** |
|
Wal-Mart (NYSE:WMT) |
45.7 |
+ |
2.8 |
- |
35.5 |
= |
13.0 |
** |
|
Target (NYSE:TGT) |
57.4 |
+ |
35.8 |
- |
53.1 |
= |
40.1 |
**** |
Each week, we look for the top companies in different industries that make fast cash, and this particular group seems to have been discounted for the most part by the 30,000-strong Motley Fool CAPS database of rated investors.
Not every company that makes fast cash will excel. We only want those firms that the CAPS community considers the best. Four- and five-star stocks are the ones the vast majority of CAPS investors believe will outperform the S&P 500.
The Foolish advantage
Of course, this isn't a list of stocks to buy or sell -- just a jumping-off point for further research. While there are mixed feelings about most of the players here, only Target enjoys strong investor support. Perhaps it's not too surprising that Wal-Mart hasn't been generating much favor with investors (even with the best cash cycle underscoring its industry power). But Kohl's two-star rating is a bit more eyebrow-raising, since it has been stealing a page from the J.C. Penney (NYSE:JCP) playbook of redesigning itself and improving operations.
Target has a respectable conversion cycle amongst its competitors and is expected to beat the markets, too. Let's see why CAPS players feel that way.
Nearly one-quarter of the CAPS All-Stars -- players who consistently outperform their peers on a regular basis -- think the big bull's-eye should have a home in your portfolio.
- Top-rated CAPS player indyjoneses feels "[t]he whole upscale version of discount just seems to be much better received across the majority of cities," to which Ganndalf adds, "I like this company because of its ability to compete against Wal-Mart while at the same time occupying a somewhat more upscale niche."
- Another CAPS All-Star, johnkernan22, notes that Target is "[j]ust the most focused, well managed retailer on this planet. More efficient than WalMart, owns the demographic their competition drools over and has room for accelerated topline and bottomline growth into new areas."
So, should Wal-Mart continue to feel that it has a Target on its back? Work with thousands of your fellow Foolish investors at Motley Fool CAPS to uncover the best stocks and convert your money into cash profits. It's absolutely free -- get started today!
Wal-Mart is a recommendation of Motley Fool Inside Value. A 30-day free trial subscription lets you rub in all of the market-beating recommendations. Click here to start yours today.
Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
