Current Ratio
It's calculated by dividing current assets by current liabilities.
The higher the ratio, the more liquid assets a company has to meet its short term obligations.
A ratio of 2 or more (meaning a company has at least twice as many short-term assets than short-term liabilities) is generally considered good.
Currently, the average current ratio for S&P 500 stocks is 1.67.
Not surprisingly, the Finance Sector (as applied to companies with over 50,000 shared traded on a daily basis) has one of the worst Current Ratios with a median of just 1.06.
How to Use
Screening for this is quite easy to do.
You can screen for this on Zacks' free custom screener on Zacks.com.
Once there, select the 'Liquidity and Coverage' Category. Then choose the 'Current Ratio' in the Criteria section. (See the image below.)
You can also take it a step further by using the Research Wizard to screen for companies with Current Ratios that are better (i.e., higher) than the average or median for their industry. Or you can even specifically focus on the Sectors and Industries with the best Current Ratios (which again, is a measure of financial strength) and then pick companies from those groups.
In this week's screen, we'll use the Current Ratio as the main focus and add other logical items to produce a stock list of sound companies with solid prospects for the future.
Screen Parameters
-
Price >= $5
-
Volume >= 100,000
- Zacks Ranks
(Only Buys and Strong Buys allowed.) -
Projected Growth Rate > median for its respective X Industry
(This means we're looking for the companies with the best growth rates within their groups.) -
Current Ratio > median for its respective X Industry
(Looking at the companies with the strongest liquid positions to meet their short-term financial obligations.) -
Current ratio > 2
(And at the very least, we want the companies to exceed the commonly held definition of good, which means greater than 2.)
DLB - Snapshot Report Dolby Laboratories, Inc.
DLTR - Snapshot Report Dollar Tree, Inc.
HANS - Snapshot Report Hansen Natural Corp.
MYGN - Analyst Report Myriad Genetics, Inc.
SSRI - Snapshot Report Silver Standard Resources, Inc.
Start using this financial strength ratio in your own screening to help you find the stocks best able to prosper during these tough financial times. Start putting these ideas and others to the test today. Sign up now for a 2-week trial to the Research Wizard and start screening and backtesting your strategies before your next trade. You can do it.
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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.