There are two parts to successful investing: Finding the winners and avoiding the losers.

But looking just for the former, especially if you focus mostly on revenue and earnings, can leave you exposed to the latter.

In order to fully benefit from your winners, you need to spot the ones to stay away from. After all, a 200% gain is completely wiped out by four other picks dropping 50% each. As for that winner, revenue and earnings are not the place to see trouble coming in time to do some good. You don't want to wait for an ugly earnings surprise that gives your stock a massive haircut before getting out.

That's why just about the first thing I read is the balance sheet. This is where the company's financial health is found and where sickness' warning signs often show up.

One balance sheet tool I like is the cash conversion cycle. It measures how fast the company turns its cash into inventory, sells that inventory, and then collects the cash on those sales. It's measured in days and, generally, the lower it is, the better. (For details on how it's calculated, check the Foolsaurus investing wiki entry, here.) It is possible to have a negative CCC, as Dell showed to great effect for several years. Seeing CCC increase can mean it's a company to avoid or exit.

This metric doesn't apply to every industry, however, such as banks. It's primarily for companies that interact with suppliers and customers, buying from one, selling to the other.

Here are three companies operating in the same industry that recently caught my eye:



1-Year Change

3-Year Change

5-Year Change

Panera Bread (Nasdaq: PNRA)





Denny's (Nasdaq: DENN)





Einstein Noah Restaurant Group (Nasdaq: BAGL)





Source: Capital IQ, a division of Standard & Poor's, and author's calculations. TTM = trailing 12 months. All numbers are in days.

Food retailers have some of the quickest cash cycles in business, and these three are no exception. Panera takes just a week to run cash all the way through its business, while Einstein (I love their bagels) is even quicker. And beleaguered Denny's is faster still. Panera has been holding steady over the past few years, though I wonder if it could move it downward a bit, improving things even more.

Of course, the cash conversion cycle should not be the end of your research, and it's best to follow trends over time. However, it can provide useful pointers to either getting in or staying away.

Go past the obsessive focus on quarterly earnings, and you'll be way ahead of the vast majority of the market's individual investors. By learning to calculate and use the cash conversion cycle, you'll more likely stay with a winning company or spot a deteriorating situation early enough to either avoid the company in the first place or get out before the company "surprises" with a bad earnings report.

The Fool owns shares of Denny's. Try any of our Foolish newsletter services free for 30 days

Fool analyst Jim Mueller, who works with the Stock Advisor newsletter service, owns shares of Denny's, but doesn't own shares of any other company mentioned. The Fool's disclosure policy has cycled through the company three times while you read this article, showing off on a unicycle.