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 = 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 industrial equipment manufacturers are turning gear boxes and conduit into cash.









CAPS Rating
 (out of 5)

DXP Enterprises (NASDAQ:DXPE)









WESCO International (NYSE:WCC)









Actuant (NYSE:ATU)









Fastenal (NASDAQ:FAST)









MSC Industrial Direct (NYSE:MSM)









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

Each week, we look for the top companies in different industries that make fast cash, and it seems the 60,000 participants in the Motley Fool CAPS investor intelligence database are pretty geared up for this particular group, with only DXP Enterprises garnering an average three-star rating.

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 zero in on investor favorite, Actuant, which has one of the lowest cash cycles and the best star rating. Of course, this isn't a list of stocks to buy or sell -- just a jumping-off point for further research.

Working capital management, actually
Industrial products and services maker Actuant has made a conscious decision to manage its working capital requirements, and was able to improve its position in its most recent quarter through a combination of timing its payments and extending an increase in payment terms with certain vendors. A company able to extract better terms for itself is usually in a superior position in its industry -- think Wal-Mart (NYSE:WMT), which can negotiate much lower prices from companies wanting to sell their wares there.

Nearly 400 investors have cast their votes for the Motley Fool Hidden Gems recommendation, and 99% believe it will outperform the market, while a near-equal percentage of All-Stars -- CAPS investors who consistently outperform their peers over time -- also think it will beat the market.

CAPS player simplylearning  has learned to look at investments where the customers need what your company is selling. Everything else is almost superfluous.

Have you seen the list of stuff these guys sell! It is incredible and there are not very many alternatives to their products. Financials are solid, highest growth in the industry

All-Star CAPS investor Somnambulo has written the top Bull pitch for Actuant, citing similar reasons to like this gritty, industrial company.

"Supplies and Engineered Solutions." is an insufficient description. They make tools, hydraulic stuff, terminals, transformers, LEDs, monitors -- all kinds of stuff that is needed. That's why retail is so much harder -- you don't need to buy that shirt at Gap, but the things sold by a company like this are unsexy but necessary. They do have alot of debt. But ROE looks good, lots of insitutional investment...moderate shorting...I think its an OK pick long term.

So which company will grind out the cash and which will be ground down? Motley Fool CAPS tell us your picks 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!

Actuant is a recommendation of Motley Fool Hidden Gems. You can actually get a 30-day, risk-free trial subscription in a flash simply by clicking here.

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. Wal-Mart is an Inside Value newsletter recommendation. The Motley Fool has a disclosure policy.