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. 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 = (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 not only to 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.
With analysts expecting retailers to experience a weak holiday shopping season, the game console market might be the one bright spot. Let's see whether any of these game sellers can be a real action hero in bringing home the cash.
|
Company |
DIO |
+ |
DSO |
- |
DPO |
= |
CCC |
CAPS Rating (out of 5) |
|---|---|---|---|---|---|---|---|---|
|
Best Buy (NYSE:BBY) |
55.8 |
+ |
5.1 |
- |
51.3 |
= |
9.6 |
*** |
|
Wal-Mart (NYSE:WMT) |
43.9 |
+ |
2.7 |
- |
35.4 |
= |
11.2 |
** |
|
GameStop (NYSE:GME) |
54.9 |
+ |
1.8 |
- |
36.5 |
= |
20.2 |
***** |
|
Circuit City (NYSE:CC) |
71.4 |
+ |
9.1 |
- |
40.7 |
= |
39.8 |
* |
|
Target (NYSE:TGT) |
58.6 |
+ |
36.8 |
- |
53.8 |
= |
41.6 |
*** |
|
Blockbuster (NYSE:BBI) |
103.4 |
+ |
6.3 |
- |
48.9 |
= |
60.8 |
* |
Each week, we look for the top companies in different industries that make fast cash. It seems that the 74,000 participants in the Motley Fool CAPS investor intelligence database haven't rung up much support for these particular firms: Almost all rate a middling three stars or less, perhaps reflecting the generally dour mood in retail. Of course, this isn't a list of stocks to buy or sell -- just a jumping-off point for further research.
Unstoppable game sales
As the only pure-play game seller here, it probably shouldn't come as a surprise that GameStop is this week's top-rated company. Investors might be surprised, however, at how well both Best Buy and Wal-Mart are able to convert their sales into cash -- about twice as fast as the gamer. GameStop, though, was able to achieve significant gains in its operating cash flow as a result of its merger with Electronics Boutique in 2005. Nintendo's Wii has been a brisk seller, invigorating the game market heading into Christmas.
Nearly 1,700 CAPS investors have cast their votes for GameStop, and 97% believe the Motley Fool Stock Advisor recommendation will outperform the market. Those giving a thumbs-up include 98% of the All-Stars -- CAPS investors who consistently outperform their peers over time -- who cast a vote.
While some investors think GameStop might have appreciated too far, too fast, others, like top-rated investor NorthWestHuslter, with a 99.12 player rating, think there's good reason for it.
The gaming sector is now larger [than] the movie industry but there [are] fewer players. Halo made 170 million in one day! That's more [than] the summer block buster movies and [their] numbers are for ... two to four days. This is the number one gaming outlet in the world that alone puts [it] on my long term buy list.
Don't be foiled again
So which company will continue to be the big star of cash creation? 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!
