Leon’s Furniture (TSE: LNF) is a well-known retailer in Canada that operates efficiently and creates value for shareholders. Therefore, investors who want exposure to the retail sector may want to consider its stock.
LNF’s Efficiency Has Remained Steady
Leon’s Furniture needs to hold onto a lot of inventory in order to keep its business running. Therefore, the speed at which LNF can move inventory and convert it into cash is critical in predicting its success. To measure its efficiency, I will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:
CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
Leon’s Furniture’s cash conversion cycle is 74 days, meaning it takes the company 74 days for it to convert its inventory into cash. In the past several years, this number has trended upwards, as it was just 58 days in Fiscal 2016, potentially indicating that the company’s efficiency has deteriorated. However, that is not really the case.
Indeed, days inventory outstanding (how long the company holds inventory), which is the most important metric in the equation when it comes to efficiency, has remained relatively flat since 2015. The same can be said for days sales outstanding.
Therefore, the culprit for the increasing CCC metric is days payable outstanding, which measures how long the company takes to pay back its suppliers. This number has decreased, meaning that Leon’s has been paying suppliers back faster. As a result, efficiency has not actually deteriorated.
In addition to the cash conversion cycle, let’s also analyze Leon’s Furniture’s gross margin trend. Ideally, I would like to see a company’s margin expand each year. This is, of course, unless its gross margin is already very high,