Identifying stocks that offer attractive returns can sometimes be tricky for investors. In such scenarios, one can consider liquidity levels which are a good indicator of a company’s financial health.
Liquidity measures a company’s ability to honor short-term debts by converting assets into cash and cash equivalents. These stocks have always been on the radar of investors because of their potential to offer attractive returns.
Nevertheless, one should be careful before investing in a stock with a high level of liquidity, as this can also suggest that the company is not able to use the assets efficiently. Therefore, it is advisable to consider a company’s level of efficiency as well as liquidity to identify likely winners.
Measures to identify liquid stocks
Current ratio: It measures current assets against current liabilities. This ratio is used to measure a company’s potential to honor short and long term debts. So a current ratio – also known as the working capital ratio – less than 1 indicates that the business has more liabilities than assets. However, a current high ratio does not always indicate that the company is in good financial health. It can also indicate that the company has not used its assets in a meaningful way. Therefore, a range of 1 to 3 is considered ideal.
Quick report: Unlike the current ratio, the Quick Ratio – also known as the âAcid Test Ratioâ or âQuick Asset Ratioâ – indicates a company’s ability to pay its obligations in the short term. It considers stocks excluding current assets in relation to current liabilities. Like the current ratio, a quick ratio greater than 1 is desirable.
Cash ratio: This is the most conservative of the three ratios, as it takes into account cash and cash equivalents as well as funds invested versus current liabilities. It measures a company’s ability to honor its debts using the most liquid assets. While a cash ratio greater than 1 may indicate a healthy financial position, a higher number may indicate inefficiency in the use of cash.
Thus, a ratio greater than 1 is desirable at all times, but may not always adequately represent the financial condition of a business.
In order to pick the best of the bunch, we added asset usage – a widely used measure of a business’s efficiency – as one of the selection criteria. Asset utilization is the ratio of total sales in the last 12 months to the average of the last four quarters of total assets. Although this ratio varies from sector to sector, companies with a higher ratio than their respective sectors can be considered efficient.
In order to ensure that these liquid and efficient stocks have strong growth potential, we have added our exclusive Growth Style Score to the screen.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (While liquidity ratios greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Use of assets above the industry average (Higher asset utilization than the industry average indicates a company’s efficiency.)
Zacks rank equal to # 1 (Only stocks with a strong buy rating can pass). You can see The full list of today’s Zacks # 1 Rank stocks here.
Growth score less than or equal to B (The back-tested results show that stocks with a Growth score of A or B when combined with a rank 1 or 2 of Zacks easily beat other stocks.)
These criteria reduced the universe from over 7,700 stocks to just 13
Here are five of the 13 actions that qualified the screen:
Based in Goleta, California, Deckers Outdoor Corporation (PLATFORM – Free Report) is a leading designer, producer and manager of innovative niche footwear and accessories brands developed for outdoor sports as well as other lifestyle activities. The company sells products primarily under five exclusive brands: UGG, HOKA, Teva, Sanuk and Koolaburra. Zacks’ consensus estimate for FY2022 earnings is set at $ 15.65 per share, up 5.3% in the past 60 days. The company has a growth score of B and a surprise four-quarter profit of 1.136%, on average.
Based in Baltimore, Maryland, Medifast (MEAN – Free Report) is a leading manufacturer and marketer of clinically proven healthy lifestyle products and programs. The Company produces, distributes and sells weight loss, weight management and healthy lifestyle products through its direct online channels as well as franchised weight control centers. Zacks’ consensus estimate for 2021 earnings is set at $ 13.83 per share, up 2.7% over the past 60 days. The company has a growth score of B and a surprise four-quarter earnings of 16%, on average.
Providence, based on IR Textron (SMS – Free Report) is a global, multi-industry company that manufactures aircraft, automotive engine components and industrial tools. It also offers solutions and services for aircraft, fastening systems as well as industrial products and components. Its products include commercial and military helicopters, light and mid-size business jets, plastic fuel tanks, automotive refinishing products, golf carts and utility vehicles, turf car equipment, industrial pumps and gears, engineered fastening systems and solutions as well as other industrial products. Zacks’ consensus estimate for 2021 earnings is set at $ 3.28 per share, up 4.5% in the past 60 days. The company has a growth score of A and a surprise profit for the last four quarters of 37.4% on average.
Based in Norwalk, Connecticut, Terex Company (TEXAS – Free Report) is a global manufacturer of aerial work platforms, material processing machines and cranes. It designs, manufactures and supports products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. The company’s manufacturing facilities are located in the United States, Canada, Europe, Australia, Asia and South America. Zacks’ consensus estimate for 2021 earnings is set at $ 3.00 per share, up 18.1% in the past 60 days. The company has a growth score of A and a surprise four-quarter profit of 307.3%, on average.
Based in Santa Barbara, California, His bone (SO NO – Free Report) is a consumer electronics company that is mainly involved in manufacturing smart speakers with immersive sound experience. The company is leveraging changing consumer technologies and entertainment trends to address customer audio consumption patterns that are largely characterized by the rapid adoption of voice assistants and streaming services. Zacks’ consensus estimate for FY2021 earnings is set at $ 1.11 per share, up 30.6% in the past 60 days. The company has a growth score of A and a surprise profit for the last four quarters of 297.3%, on average.
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