The Unappreciated Awesomeness at AmerisourceBergen
When judging a company's prospects, how quickly it turns cash outflows into cash inflows can be just as important as how much profit it's booking in the accounting fantasy world we call "earnings." This is one of the first metrics I check when I'm hunting for the market's best stocks. Today, we'll see how it applies to AmerisourceBergen (NYS: ABC) .
In this series, we measure how swiftly a company turns cash into goods or services and back into cash. We'll use a quick, relatively foolproof tool known as the cash conversion cycle, or CCC for short.
To calculate the cash conversion cycle, add days inventory outstanding to days sales outstanding, then subtract days payable outstanding. Like golf, the lower your score here, the better. The CCC figure for AmerisourceBergen for the trailing 12 months is -.3.
In this series, I'm most interested in comparing a company's CCC to its prior performance. Here's where I believe all investors need to become trend-watchers. Sure, there may be legitimate reasons for an increase in the CCC, but all things being equal, I want to see this number stay steady or move downward over time.
Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.
Because of the seasonality in some businesses, the CCC for the TTM period may not be strictly comparable to the fiscal-year periods shown in the chart. Even the steadiest-looking businesses on an annual basis will experience some quarterly fluctuations in the CCC. To get an understanding of the usual ebb and flow at AmerisourceBergen, consult the quarterly-period chart below.
Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.
Based only on the raw number, AmerisourceBergen has achieved the enviable feat of running a negative CCC cycle. That is, it typically collects what is owed it before it pays what it owes to others. On a 12-month basis, the trend at AmerisourceBergen looks very good. At -0.3 days, it is 2.3 days better than the five-year average of 1.9 days. The biggest contributor to that improvement was DPO, which improved 1.8 days compared to the five-year average. That was partially offset by a 0.5-day increase in DIO.
Considering the numbers on a quarterly basis, the CCC trend at AmerisourceBergen looks good. At -1.9 days, it is 2.5 days better than the average of the past eight quarters. With both 12-month and quarterly CCC running better than average, AmerisourceBergen gets high marks in this cash-conversion checkup.
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The article The Unappreciated Awesomeness at AmerisourceBergen originally appeared on Fool.com.Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor ofMotley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.