MENU

Is Cash Rich Genting Singapore PLC A Buy?

“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 the integrated resort operator Genting Singapore PLC (SGX: G13) through this calculation today. We will be using the company’s figures for the financial year ended 31 December 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.

2014 Genting DIO

Source: Genting 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.

2014 Genting DSO

Source: Genting 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.

2014 Genting DPO

Source: Genting 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 Genting Singapore a cash conversion cycle of 34 days for the financial year ended 31 December 2014 (10 + 140 – 116 = 34).

As an integrated resort operator, there isn’t as much physical inventory that Genting Singapore has to maintain on its balance sheet as compared to say a manufacturing outfit. This is reflected in the company’s low DIO of just 10 days.

That said, Genting Singapore maintains a high DSO of 140 days which contributed the bulk of the number of days seen in the cash conversion cycle. My colleague Stanley Lim has previously expressed his concerns about the high level of accounts receivable at Genting Singapore in his article here:

“Having receivables which can be collected on time is all right. The issue here is that more bad debts may be on the table for Genting Singapore. In 2014, the integrated resort owner had to impair S$262 million worth of trade receivables (to impair is to essentially treat the receivable as uncollectable), up 42% from 2013.”

As Stanley notes, this is certainly something to watch carefully.

In all, the cash conversion cycle of 34 days would mean that the business of Genting Singapore would require working capital to finance. The company spots a good cash-to-debt ratio which may be enough to support its operations. Foolish investors might also want to watch how Genting Singapore’s business develops in the coming quarters after it reported disappointing results for the first quarter of 2015.

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

With that, the Foolish investor would be in a better position to decide if Genting Singapore’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.

For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

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.