Identifying stocks that offer healthy returns may sometimes prove to be difficult for investors. In that case, one may take into account liquidity levels, which are considered a good indicator of a company’s financial health.
Liquidity is a measure of a company’s capability to meet its short-term debt obligations.
However, high liquidity may also suggest a company’s inefficiency in utilizing assets properly. Thus, impressive liquidity positions and favorable efficiency levels imply a stock’s solid financial health.
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.
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 seven.
Here are four of the seven stocks that qualified the screen:
San Jose, CA-based A10 Networks, Inc. ATEN provides software-based application networking solutions, which enable enterprises, service providers, Web giants, and government organizations to enhance, secure, and optimize the performance of their data center applications and networks. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 4.8% to 22 cents in the past 60 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 60.72%, on average.
Domiciled in Sunnyvale, CA, Fortinet, Inc. FTNT is a provider of network security appliances and Unified Threat Management (“UTM”) network security solutions to enterprises, service providers and government entities worldwide. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 2.2% to $2.81 per share in the past 60 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 16.05%, on average.
Headquartered in Omaha, NE, Valmont Industries, Inc. VMI is primarily engaged in the production of fabricated metal products, metal and concrete pole and tower structures, and mechanized irrigation systems. The Zacks Consensus Estimate for 2020 earnings has been revised upward by a cent to $6.37 in the past 60 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 3.95%, on average.
Baltimore, MD-based, Medifast, Inc. MED manufactures and distributes weight loss, weight management, healthy living products, and other consumable health and nutritional products. The Zacks Consensus Estimate for current-year earnings has been revised upward by 1.2% over the last 60 days to $6.87 per share. The company has a Growth Score of B. It has a trailing four-quarter earnings surprise of 14.75%, on average.
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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.
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Valmont Industries, Inc. (VMI): Free Stock Analysis Report
Fortinet, Inc. (FTNT): Free Stock Analysis Report
MEDIFAST INC (MED): Free Stock Analysis Report
A10 Networks, Inc. (ATEN): Free Stock Analysis Report
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