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Should You Buy Wing Tai Holdings Limited?

“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 to 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 property developer and lifestyle company, Wing Tai Holdings Limited (SGX: W05) through this calculation today. We will be using the figures from the firm’s financial year ended 31 June 2014 (FY2014) in this example.

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.

2015-06-02 Wingtai DIO

Source: Wing Tai Holdings’ 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 Wingtai DSO

Source: Wing Tai Holdings’ 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 Wingtai DPO

Source: Wing Tai Holdings’ 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 Wing Tai Holdings a cash conversion cycle of a negative 152 days for FY2014 (23 + 36 – 211 = -152).

Its notable that Wing Tai Holdings is able to hold off paying its suppliers (211 days) for way longer than it takes to collect payment from its customers (36 days). The high DPO level in this case has helped push the company towards a negative cash conversion cycle of 152 days.

It is also important to note that a major part of Wing Tai Holdings’ business comes from development properties (68% of sales in 2014) and this part of the business can be prone to volatility. To that point, revenue from the property development segment fell by close to 50% in FY2014.

Fortunately for Wing Tai, its negative cash conversion cycle may help it to tide over rough patches that it may encounter.

Over time, tracking the changes in the cash conversion cycle of a company may help the Foolish investor understand the business changes that the firm 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 Wing Tai Holdings’ current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.

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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.