# Is Hour Glass Ltd Gushing with Cash?

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent. When bills come due, only cash is legal tender. Don’t leave home without it.”

— Warren Buffett

As we search for positive signs in a new company, the cash flowing through the firm may be one thing worth looking up. In particular, the cash conversion cycle of a company may be of interest to the Foolish investor.

Turning goods into cash

Simply said, the cash conversion cycle is the number of days it takes for a company to 1) convert cash in the bank into inventory, 2) sell that inventory, and 3) receive the cash from the sale. The shorter the cycle goes, the better.

To learn how to calculate the cash conversion cycle, go here.

Let’s run Hour Glass Ltd (SGX: AGS), a luxury watch retailer, through this calculation today. We will be using the company’s figures for the financial year ended 31 March 2014.

We start with the Days Inventory Outstanding (DIO) metric. DIO is the number of days that it takes for a company to sell its entire inventory. Generally speaking, the lower the number of days, the more effective the company’s inventory management is.

Below is a summary table with all the relevant figures.

Source: Hour Glass’s earnings report

Next up, we have the Days Sales Outstanding (DSO) figure. DSO represents the amount of time it takes the company, on average, to receive money after it has sold a good or service. Having a lower DSO usually indicates that a company is good at credit management.

Source: Hour Glass’s earnings report

Finally, we come to the Days Payable Outstanding (DPO), which is the number of days it takes a company to pay its suppliers after their products have arrived. In general, having a longer payment term is better for a company.

Source: Hour Glass’s earnings report

Pulling it together

The cash conversion cycle can now be put together by adding the DIO with DSO and subtracting the DPO. This would give Hour Glass a cash conversion cycle of 161 days for the financial year ended 31 March 2014 (183 + 11 – 33 = 161).

In the case of Hour Glass, the company maintained a DIO of 83 days. This was due to the sizable inventory position that the luxury watch outfit maintains on its balance sheet. The DIO was the main contributor to the larger number of days in its cash conversion cycle.

In all, the cash conversion cycle of 161 days would mean that business of Hour Glass would require working capital to finance. That said, the luxury retail outfit has a fair cash to debt ratio which may be enough to help support this cycle.

Over time, tracking the changes in a company’s cash conversion cycle may help the Foolish investor understand the business changes that the company makes and whether those changes helps bring in the cash faster.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.