Investing in liquid companies is considered profitable as liquidity measures a company’s financial health. It measures a corporate entity’s ability to meet short-term debt obligations by converting assets into liquid cash and equivalents. Companies with favorable liquidity levels are not only reckoned to be financially strong but are also believed to generate healthy returns.
However, one should exercise caution before investing in such stocks.While a high liquidity level may imply that the company is meeting its obligations at a faster rate than its peers, it may also indicate that the company is failing to use its assets efficiently.
Hence, one may consider the efficiency level of a company in addition to its liquidity to identify potential winners.
Measures to Identify Liquid Stocks
Current Ratio: It measures current assets relative to current liabilities. This ratio is used for measuring a company’s potential to meet both short- and long-term debt obligations. Thus, a current ratio — also known as working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company is in good financial shape. It may also mean that the company has failed to utilize its assets significantly. Hence, a range of 1 to 3 is considered ideal.
Quick Ratio: Unlike current ratio, quick ratio — also called “acid-test ratio" or "quick assets ratio" — indicates a company’s ability to pay short-term obligations. It considers inventory excluding current assets relative to current liabilities. Like the current ratio, a quick ratio of greater than 1 is desirable.
Cash Ratio: This is the most conservative ratio among the three, as it takes into account only cash and cash equivalents, and invested funds relative to current liabilities. It measures a company’s ability to meet its current debt obligations using the most liquid of assets. Though a cash ratio of more than 1 may point to sound financials, a higher number may indicate inefficiency in cash utilization.
So, a ratio greater than 1 is desirable at all times but may not always appropriately represent a company’s financial condition.
Screening Parameters
In order to pick the best of the lot, we have added asset utilization, which is a widely used measure of a company’s efficiency, as one of the screening criteria. Asset utilization is the ratio of total sales over the past 12 months to the last four-quarter average of total assets. Though this ratio varies across industries, companies with a ratio higher than their respective industries can be considered efficient.
In order to ensure that these liquid and efficient stocks have solid growth potential, we have added our proprietary Growth Style Score to the screen.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (While liquidity ratios of greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Asset utilization greater than industry average (Higher asset utilization than the industry average indicates a company’s efficiency.)
Zacks Rank equal to #1 (Only Strong Buy-rated stocks can get through). You can see the complete list of today’s Zacks #1 Rank stocks here.
Growth Score less than or equal to B (Back-tested results show that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 or 2 handily beat other stocks.)
These criteria have narrowed down the universe of more than 7,700 stocks to only five.
Here are four of the five stocks that qualified the screen:
Niwot, CO-based, Crocs, Inc. CROX is a provider of innovative casual footwear for men, women and children.The company has a Growth Score of A and delivered average four-quarter positive surprise of 126.3%. The Zacks Consensus Estimate for fiscal 2018 earnings has remained unchanged at 45 cents over the past 30 days.
Headquartered in Bedford, MA, Novanta Inc. NOVT provides photonics, vision and precision motion components and sub-systems to original equipment manufacturers in the medical and industrial markets worldwide.The company has a Growth Score of A and pulled off average four-quarter earnings surprise of 11.6%. The Zacks Consensus Estimate for fiscal 2018 earnings of $2.11 has remained stable over the past 30 days.
Abercrombie & Fitch Company ANF, domiciled in New Albany, OH, is one of the world’s elite specialty retailers for apparel. The company has a Growth Score of B and came up with average four-quarter beat of 11.6%. The Zacks Consensus Estimate for fiscal 2019 earnings of 92 cents inched 1% up over the past 30 days.
Billerica, MA-based Bruker Corporation BRKR designs and manufactures scientific instruments plus analytical and diagnostic solutions.The company has a Growth Score of B and delivered average four-quarter positive earnings surprise of 9.13%. The Zacks Consensus Estimate for fiscal 2018 earnings of $1.40 remained flat over the past 30 days.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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