Building a portfolio comprising stocks with favorable liquidity is the way to go for investors seeking healthy returns. Liquidity indicates a company's capability to meet its short-term debt obligations by converting assets into liquid cash and equivalents. Thus, companies boasting impressive liquidity positions may be considered the ones with solid financial health.
However, high liquidity may also signify a company's inefficiency to utilize its assets effectively. It is therefore important to also focus on efficiency alongside 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.
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 six.
Here are four of the six 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 increased by a penny to 46 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 been stable over the past 30 days.
Abercrombie & Fitch CompanyANF , 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 88.6%. The Zacks Consensus Estimate for fiscal 2019 earnings of 95 cents inched 3.3% up over the past 30 days.
Reston, VA-based Maximus, Inc.MMS is a leading provider of government health and human services programs in the United States, Australia, the United Kingdom, Canada and Saudi Arabia. The company has a Growth Score of B and delivered average four-quarter positive surprise of 2.82%. The Zacks Consensus Estimate for fiscal 2019 earnings of $3.66 has 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.