One Reason Matthews International’s Earnings Aren’t So Hot

July 14, 2011
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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 makes real cash money can be just as important as how much it’s currently generating in the accounting fantasy world we call “earnings.” It’s 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 Matthews International.

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Let’s break this down

To measure how swiftly a company turns cash into goods or services and back into cash, we’ll lean on a quick, relatively foolproof metric known as the cash conversion cycle, or CCC for short.

Why does the CCC matter? The less time it takes a company to convert outgoing cash into incoming cash, the more powerful and flexible the profit engine is. The less money tied up in inventory and accounts receivable, the more that’s available to grow the company, pay investors, or both.

To calculate the cash conversion cycle, add days inventory outstanding (DIO) to days sales outstanding (DSO) and then subtract days payable outstanding (DPO). As in golf, the lower your score here, the better.

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