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 = (average inventory / annual cost of goods sold) * 365 days
-
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 = (average accounts receivable / annual sales) * 365 days
-
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 is available to spend on things it needs, like inventory, so we want this number to be higher.
DPO = (average accounts payable / annual cost of goods sold) * 365 days
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 lower the result, the better.
|
Company |
DIO |
+ |
DSO |
- |
DPO |
= |
CCC |
CAPS Rating (out of 5) |
|---|---|---|---|---|---|---|---|---|
|
STMicroelectronics |
58.4 |
+ |
83.8 |
- |
72.7 |
= |
69.5 |
** |
|
Fairchild Semiconductor |
73.5 |
+ |
37.3 |
- |
38.3 |
= |
72.5 |
** |
|
Texas
Instruments |
75.0 |
+ |
50.5 |
- |
37.8 |
= |
87.7 |
**** |
|
National Semiconductor |
90.6 |
+ |
36.4 |
- |
36.8 |
= |
90.2 |
*** |
|
Analog Devices |
125.7 |
+ |
49.7 |
- |
51.5 |
= |
123.9 |
**** |
Each week, we look for the top companies in different industries that make fast cash, and it seems the 65,000 participants in the Motley Fool CAPS investor intelligence database hasn't rung up much in the way of backing, as almost all rate an average three stars or less.
Not every company that makes fast cash will excel. We generally 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. So we'll calculate the speediest of the four-star bunch and take a closer look at Texas Instruments, which is able to turn silicon into cash only about three weeks slower than the zippy STMicroelectronics.
Of course this isn't a list of stocks to buy or sell -- just a jumping-off point for further research.
The not-so-lonely star
Even as it generates a prodigious amount of free cash flow, Texas Instruments has sought to enhance shareholder value by going big with aggressive share repurchase programs. If it continues to remain on target in the mobile handset market, companies like Nokia
More than 900 investors cast their votes for Texas Instruments. 93% believe it will outperform the market, while 92% of All-Stars -- CAPS investors who consistently outperform their peers over time -- agree.
Top-rated All-Star timb06 points to a manufacturing model that enables TI to seize opportunities.
TXN has leadership positions in a number of segments that are growing faster compared to the overall semiconductor industry. In addition, TXN utilizes a flexible manufacturing model which enables the company to adjust its business quickly to preserve profit margins during intense pricing environments.
Go green!
So which company will continue to compute the cash? Tell us your picks at Motley Fool CAPS as you work with thousands of your fellow Foolish investors to uncover the best stocks and convert your money into cash profits. Best of all, it's absolutely free -- get started today!
