(prHWY.com) November 19, 2011 - zhengzhou, China -- It takes money to make money. Most investors know that, but with business media so focused on the "how much," very few investors bother to ask, "How fast?"
When judging a company's prospects, how quickly it turns cash outflows into cash inflows can be just as important as how much profit it's booking in the accounting fantasy world we call "earnings." This is one of the first metrics I check when I'm hunting for the market's best stocks. Today, we'll see how it applies to Barrick Gold (NYSE: ABX ) .
Let's break this down
In this series, we measure how swiftly a company turns cash into goods or services and back into cash. We'll use a quick, relatively foolproof tool known as the cash conversion cycle, or CCC for short.
Why does the CCC matter? The less time it takes a firm to convert outgoing cash into incoming cash, the more powerful and flexible its profit engine is. The less money tied up in inventory and accounts receivable, the more available to grow the company, pay investors, or both.
To calculate the cash conversion cycle, add days inventory outstanding to days sales outstanding, then subtract days payable outstanding. Like golf, the lower your score here, the better.
Here's the CCC for Barrick Gold, alongside the comparable figures from a few competitors and peers.
Company
TTM Revenue
TTM CCC
Barrick Gold $13,457 44
Goldcorp (NYSE: GG ) $5,229 17
Kinross Gold (NYSE: KGC ) $3,914 127
Newmont Mining (NYSE: NEM ) $10,141 212
Source: S&P Capital IQ. Dollar amounts in millions. Data is current as of last fully reported fiscal quarter. TTM = trailing 12 months.
For younger, fast-growth companies, the CCC can give you valuable insight into the sustainability of that growth. A company that's taking longer to make cash may need to tap financing to keep its momentum. For older, mature companies, the CCC can tell you how well the company is managed. Firms that begin to lose control of the CCC may be losing their clout with their suppliers (who might be demanding stricter payment terms) and customers (who might be demanding more generous terms). This can sometimes be an important signal of future distress -- one most investors are likely to miss.
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