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 dash for faster cash
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. Here's how the cycle's three components 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, 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.

Here's a look at how a number of the best-known drugstores are turning bandages and diapers into cash.

Company

DSO

+

DIO

-

DPO

=

CCC

CAPS Rating (out of 5)

Longs Drug Stores (NYSE:LDG)

20.2

+

45.9

-

33.6

=

32.5

***

Walgreen (NYSE:WAG)

14.1

+

58.2

-

35.2

=

37.1

****

Rite Aid (NYSE:RAD)

7.9

+

65.2

-

25.2

=

47.9

***

CVS Caremark (NYSE:CVS)

20.1

+

60.7

-

24.9

=

55.9

*****

Source: CapitalIQ, a division of Standard & Poor's.

Each week, we look for the top companies in different industries that make fast cash. It seems that the 65,000 participants in the Motley Fool CAPS investor intelligence database are pretty geared up for this particular group, with two of the four companies garnering high ratings.

Not every company that makes fast cash will excel. We generally only want those firms that the CAPS community considers the best. The majority of CAPS investors believe that these four- and five-star stocks will outperform the S&P 500. Today, we'll zero in on investor favorite Walgreen, which has one of the lowest cash cycles and one of the best star ratings. Of course, this isn't a list of stocks to buy or sell -- just a jumping-off point for further research.

A wall around working capital
Pharmacy and general-merchandise retailer Walgreen has enjoyed years of revenue growth, particularly thanks to its pharmacy benefit management business under the Medicare Part D prescription plan. While that area had strong growth last year, the company lost its contract with UnitedHealth Group's (NYSE:UNH) Ovations business in December. Over the next few quarters, we may see some deterioration of Walgreen's cash conversion cycle.

More than 900 investors have cast their votes for Walgreen, and 94% believe it will outperform the market; 95% of All-Stars -- CAPS investors who consistently outperform their peers over time -- agree.

CAPS investor BeautifulPlumage, with a 96.93% player rating, sees Walgreen as the lighter, more vigorous player in the field, even though he owns Rite Aid:

I own RAD and think it has more explosive potential, but WAG is clearly the class of the field, trades at a historically low P/E of 20 and has a history of strong organic growth, a strong brand, solid management, virtually no debt, and would do well in an inflationary recession while RAD and CVS struggle with their heavy debt loads.

Earlier this year, ratskins wondered whether the pharmacy chain would be akin to Wal-Mart (NYSE:WMT) or Starbucks (NASDAQ:SBUX), with a pharmacy counter on every corner.

Yes, it seems as if Walgreen is past it's big expansion phase. Is it like Walmart or Starbucks where it seems like there is a store on every block? Well, I don't think Walgreen is at that point yet. Yes, they are abundant, but I still see plenty of room to open additional outlets at this point. This company is well managed and lacks the drama that frankly I can do without. We have a squeaky clean balance sheet boasting zero long term debt. Return on equity is in the 17% range the last five years in a row. Shares are not being diluted by shareholder-unfriendly management. Earnings have an average growth rate of over 21% annually over the last five years. On the minus side, shares are not selling at a discount right now (3/1/07). Still, if one is concerned about safety then this is one boat that is unlikely to sink. This is a luxury cruiser...not a racing hydroplane.

Go green!
So which company will grind out the cash, and which will be ground down? At Motley Fool CAPS, you can tell us your picks, working with thousands of your fellow Foolish investors to uncover the best stocks. Best of all, it's absolutely free -- get started today!

Starbucks and UnitedHealth are recommendations of Motley Fool Stock Advisor. UnitedHealth and Wal-Mart are Motley Fool Inside Value picks.

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's disclosure policy prefers swim trunks to Speedos.