A Hidden Reason That Libbey's Earnings Are Outstanding
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 Libbey (AMEX: LBY).
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 Libbey for the trailing 12 months is 89.6.
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 Libbey, consult the quarterly-period chart below.
Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.
On a 12-month basis, the trend at Libbey looks good. At 89.6 days, it is 7.7 days better than the five-year average of 97.3 days. The biggest contributor to that improvement was DIO, which improved 4.7 days compared to the five-year average.
Considering the numbers on a quarterly basis, the CCC trend at Libbey looks good. At 90.9 days, it is 10.5 days better than the average of the past eight quarters. With both 12-month and quarterly CCC running better than average, Libbey gets high marks in this cash-conversion checkup.
Though the CCC can take a little work to calculate, it's definitely worth watching every quarter. You'll be better informed about potential problems, and you'll improve your odds of finding underappreciated home run stocks.
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The article A Hidden Reason That Libbey's Earnings Are Outstanding 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. The Motley Fool has no position in any of the stocks mentioned. 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.
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