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 you how quickly a company takes its raw materials, makes them into products, and turns sales into cash in the bank. 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 a quick sale, but also get paid for it 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 has more time to use its cash to earn interest, so we want this number to be higher.
    DPO = 365 days/(cost of goods sold/accounts payable)

We don't need an average of our bills outstanding here; we just need to know the ending number.

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 are five retailers that are making cash hand over fist:

Company

DIO

+

DSO

-

DPO

=

CCC

CAPS Rating (out of 5)

Amazon.com (NASDAQ:AMZN)

26.7

 

9.1

 

43.0

 

(7.2)

*

Audible (NASDAQ:ADBL)

2.7

 

16.1

 

29.7

 

(10.9)

**

Blue Nile (NASDAQ:NILE)

23.9

 

2.2

 

104.4

 

(78.3)

***

Palm (NASDAQ:PALM)

16.2

 

38.9

 

65.7

 

(10.6)

**

Select Comfort (NASDAQ:SCSS)

27.5

 

6.3

 

55.0

 

(21.2)

****

Sources: CapitalIQ, a division of Standard & Poor's; Motley Fool CAPS.

All of these retailers have the happy circumstance of having a negative cash conversion cycle -- that means their payables are larger than their receivables and inventories combined. They're getting money into their businesses before ever having to pay out a dime.

That's market power, and each week we look for the top companies that make fast cash.

But unlike Tom Gardner at Motley Fool Hidden Gems, who digs deep into the financials (using more than 70 different metrics) to come up with top investment prospects, we're going to turn to Motley Fool CAPS, the 28,000-strong investor intelligence database.

Not every company that makes fast cash will excel. We only want those the CAPS community thinks are the best. Four- and five-star stocks are the ones investors believe will outperform the S&P 500.

The Foolish advantage
Of course, this isn't a list of stocks to buy or sell. It's the jumping-off point for further research. And the CAPS community is telling us to start with Hidden Gems recommendation Select Comfort and its four-star rating.

Even with the tough quarter the premium bed maker just reported, CAPS investors still see the company as stronger than an inner coil spring. Here's rgrossfool explaining some possible reasons behind the numbers and the opportunity:

Net sales increased about 3%, however that was only due to new store openings as year-over-year sales at existing stores fell 11%. A very significant decline. I think the possible culprit is the housing slowdown. I am thinking many people buy new mattresses when they get new houses. With this in mind I would not be surprised to see them miss their full year estimate for earnings. However, if that happens I would view it as a highly favorable buying situation. The business model seems solid. I believe any slowdown will be a temporary setback for this otherwise successful company.

Has this pick been put to bed? Work with tens of thousands of your fellow Foolish investors at Motley Fool CAPS to uncover the best stocks and convert your money into cash profits. Click here to get started today right away at no cost to you.

Select Comfort and Blue Nile are Motley Fool Hidden Gems selections. A 30-day trial subscription gives you a fast look at all of the recommendations currently beating the market by 34 percentage points. Click here to start! Blue Nile is also a recommendation of Motley Fool Rule Breakers. Amazon and Palm are Stock Advisor picks.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.