




One balance sheet tool I like is the cash conversion cycle (CCC). It measures how fast the company turns its cash into inventory, sells that inventory, and then collects the cash on those sales. It's measured in days and, generally, the lower it is, the better. (For details on how it's calculated, check the Foolsaurus investing wiki entry.) It is possible to have a negative CCC, as Dell showed to great effect for several years. Seeing CCC increase can mean it's a company to avoid or exit.





1-Year Change

3-Year Change

5-Year Change

True Religion Apparel (Nasdaq: TRLG)





Joe's Jeans (Nasdaq: JOEZ)





Phillips-Van Heusen (NYSE: PVH)






True Religion has apparently lost control of its cash cycle, increasing it by nearly 60% from five years ago. Most of that increase, however, has come in the past three years, and it's mostly because of a massive increase in days inventory outstanding. In other words, it's not moving inventory as quickly as it should. That's a pretty big warning sign, Fools, that requires, at least, further investigation into what management is doing with the situation and whether those methods are successful.

Of course, the cash conversion cycle should not be the end of your research and it's best to follow trends over time. However, it can provide useful pointers to either getting in or staying away.

Go past the obsessive focus on quarterly earnings and you'll be way ahead of the vast majority of the market's individual investors. By learning to calculate and use the cash conversion cycle, you'll more likely stay with a winning company or spot a deteriorating situation early enough to either avoid the company in the first place or get out before the company "surprises" with a bad earnings report.