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5 Stocks with Favorable Liquidity Ratios for High Returns
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A company’s liquidity position indicates its financial health. Companies that effectively meet debt obligations by converting their assets into liquid cash and equivalents are expected to offer healthy returns.
However, high liquidity alone does not imply that a company is financially strong. It may also indicate that the company is inefficient when it comes to utilizing its assets. Thus, one should also consider efficiency level in addition to liquidity to avoid selecting companies that have a weak financial position.
Measures of Liquidity
Liquidity ratios – current, quick and cash – are the popular indicators of liquidity levels. Favorable liquidity ratios may help an investor to identify a company’s capability of converting its assets to meet its debt obligations. While current ratio or working capital ratio seeks to measure a company’s potential to meet its short- as well as long-term debt obligations, a company’s quick ratio or acid-test ratio or quick assets ratio indicates its capability of meeting only short-term debt obligations. This is why current ratio takes current assets relative to current liabilities into consideration, while quick ratio is a ratio of current assets excluding inventory to current liabilities.
On the other hand, the most conservative of the liquidity ratios, cash ratio aims to measure a company’s potential to pay its current debt obligations by converting its most liquid assets. In order to achieve its objective, cash ratio only considers cash and cash equivalents relative to current liabilities. Though a higher value of these ratios may indicate that the company has a good financial position, significantly high values may signal that the company is inefficiently utilizing its assets. Hence, companies with liquidity ratios between 1 and 3 are considered to have favorable liquidity levels.
Screening Parameters
Besides considering ideal ranges of liquidity ratios, we have added asset utilization to our screening parameters with an objective to screen efficient stocks only. Asset utilization is a ratio of total sales over the past 12 months to the last four-quarter average of total assets. It is considered to be one of the popular means of identifying efficient companies.
In order to make the strategy more profitable, we have added our proprietary Growth Style Score to the screen with an objective to ensure that these liquid and efficient stocks have solid growth potential too.
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.)
(Back-tested results show that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 (Buy) handily beat other stocks.)
Just these few criteria have narrowed down the universe of over 7,700stocks to only 13.
Here are five stocks from the list:
Alpha & Omega Semiconductor, Ltd. (AOSL - Free Report) is engaged in designing, developing and supplying a broad range of power semiconductors globally. Alpha & Omega Semiconductor has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 54.8%.
Amphastar Pharmaceuticals, Inc. (AMPH - Free Report) focuses primarily on developing, manufacturing, marketing, and selling generic and proprietary injectable and inhalation products. Amphastar has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of more than 100%.
Tilly's, Inc. (TLYS - Free Report) is a specialty retailer in the action sports industry selling clothing, shoes and accessories. Tilly's has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 73.7%.
NetEase, Inc. (NTES - Free Report) is an Internet technology company engaged in the development of applications, services and other technologies for the Internet in China. NetEase has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 28.3%.
Shutterstock, Inc. (SSTK - Free Report) is a global marketplace for digital imagery. Shutterstock has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 28.3%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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5 Stocks with Favorable Liquidity Ratios for High Returns
A company’s liquidity position indicates its financial health. Companies that effectively meet debt obligations by converting their assets into liquid cash and equivalents are expected to offer healthy returns.
However, high liquidity alone does not imply that a company is financially strong. It may also indicate that the company is inefficient when it comes to utilizing its assets. Thus, one should also consider efficiency level in addition to liquidity to avoid selecting companies that have a weak financial position.
Measures of Liquidity
Liquidity ratios – current, quick and cash – are the popular indicators of liquidity levels. Favorable liquidity ratios may help an investor to identify a company’s capability of converting its assets to meet its debt obligations. While current ratio or working capital ratio seeks to measure a company’s potential to meet its short- as well as long-term debt obligations, a company’s quick ratio or acid-test ratio or quick assets ratio indicates its capability of meeting only short-term debt obligations. This is why current ratio takes current assets relative to current liabilities into consideration, while quick ratio is a ratio of current assets excluding inventory to current liabilities.
On the other hand, the most conservative of the liquidity ratios, cash ratio aims to measure a company’s potential to pay its current debt obligations by converting its most liquid assets. In order to achieve its objective, cash ratio only considers cash and cash equivalents relative to current liabilities. Though a higher value of these ratios may indicate that the company has a good financial position, significantly high values may signal that the company is inefficiently utilizing its assets. Hence, companies with liquidity ratios between 1 and 3 are considered to have favorable liquidity levels.
Screening Parameters
Besides considering ideal ranges of liquidity ratios, we have added asset utilization to our screening parameters with an objective to screen efficient stocks only. Asset utilization is a ratio of total sales over the past 12 months to the last four-quarter average of total assets. It is considered to be one of the popular means of identifying efficient companies.
In order to make the strategy more profitable, we have added our proprietary Growth Style Score to the screen with an objective to ensure that these liquid and efficient stocks have solid growth potential too.
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 (Strong Buy)
(Only Strong Buy rated stocks can get through.) You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Growth Style Score less than or equal to B
(Back-tested results show that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 (Buy) handily beat other stocks.)
Just these few criteria have narrowed down the universe of over 7,700stocks to only 13.
Here are five stocks from the list:
Alpha & Omega Semiconductor, Ltd. (AOSL - Free Report) is engaged in designing, developing and supplying a broad range of power semiconductors globally. Alpha & Omega Semiconductor has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 54.8%.
Amphastar Pharmaceuticals, Inc. (AMPH - Free Report) focuses primarily on developing, manufacturing, marketing, and selling generic and proprietary injectable and inhalation products. Amphastar has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of more than 100%.
Tilly's, Inc. (TLYS - Free Report) is a specialty retailer in the action sports industry selling clothing, shoes and accessories. Tilly's has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 73.7%.
NetEase, Inc. (NTES - Free Report) is an Internet technology company engaged in the development of applications, services and other technologies for the Internet in China. NetEase has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 28.3%.
Shutterstock, Inc. (SSTK - Free Report) is a global marketplace for digital imagery. Shutterstock has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 28.3%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »