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 keeps its 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 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.









CAPS Rating (out of 5)

Advance Auto Parts (NYSE:AAP)









AutoZone (NYSE:AZO)









O'Reilly Automotive (NASDAQ:ORLY)









Pep Boys (NYSE:PBY)









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 29,000-strong Motley Fool CAPS investor intelligence database.

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.

Interestingly, the two low-rated stocks have the better cycles. While payables seem to be driving the biggest differential here, considering the footprint that both Advance Auto Parts and O'Reilly have, they should also be able to command better terms. Advance operates some 3,000 stores, and O'Reilly 1,600, compared with 3,800 at AutoZone and 600 at Manny, Moe, and Jack.

One-third of all the CAPS All-Stars -- players who consistently outperform their peers on a regular basis -- rating O'Reilly think the auto parts retailer will see its stock advance against the market.

  • CAPS player xietangren cogently argues that O'Reilly has set itself up nicely to benefit from the need for its products. "Much of the appeal of this 50-year-old firm is that demand for car parts and accessories is relatively stable, since most automotive work is done out of necessity rather than by choice. That provides the stock with some downside protection even in a slowing economy. O'Reilly's $2.2 billion in annual sales is split evenly between do-it-yourselfers and professional installers, giving it a broad foundation."
  • That's a view echoed by market analyst and research firm Netscribes. "It is a fact that vehicle maintenance is done out of necessity, rather than by choice. Therefore, during economic downturns, as seen in the previous quarter, most customers defer maintenance of their vehicle. This postponement of repair and maintenance should materialize in the quarters ahead. Additionally, factors like increasing number of cars coming off warranty period coupled with a decline in gasoline price, as projected by Energy Information Administration, will aid the company to boost its performance."

So, should you take part in the continued advance of aftermarket auto parts? 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!

AutoZone is a former 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 does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.