“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 Boustead Singapore Limited (SGX: F9D), a provider of infrastructure-related engineering services and geo-spatial technology, through this calculation today.

We will be using the figures for the financial year ended 31 March 2014 (FY 2014) in this case.

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: Boustead Singapore’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: Boustead Singapore’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: Boustead Singapore’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. Doing so would give Boustead Singapore a cash conversion cycle of -168 days for FY2014 (6 + 83 – 257 = -168).

In the case of Boustead Singapore, the company maintained a low DIO of 6 days. Furthermore, the DPO was stretched to a significant 257 days. Both the low DIO and high DPO were main contributors to the negative cash conversion cycle.

This would be helpful for Boustead Singapore as it would require less cash to be tied up in the daily operations of its business.

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.